IDP Education: Waiting for a rebound

About the author:

James Barker
Author name:
By James Barker
Job title:
Former Associate Analyst
Date posted:
12 May 2021, 3:30 PM
Sectors Covered:
Retail, Technology and Telecommunications

  • IDP Education (ASX:IEL) recently provided an update, highlighting some short-term issues regarding testing/student placement capacity reflecting COVID-19 impacts primarily in India.
  • We downwardly revise our forecasts, reflecting short-term impediments to IEL’s recovery, but flag that pent-up demand is likely to flow through from FY22-onwards.
  • ADD rating maintained; new price target (login to view).

Update provided

IEL recently provided an update (broker conference presentation). For its student placement division, IEL noted the following: 83 out of 127 student placement offices are open as at March-end; most Indian offices have returned to virtual operations; and the focus currently is for the Northern Hemisphere autumn intake.

For IELTS, IEL noted: IELTS demand remains strong; there are capacity challenges due to COVID-19 restrictions in some regions (particularly India); IEL is responding to restrictions by managing demand into future periods; there have been 88 CDT centres opened FY21- YTD (implies 30 2H21-YTD), with a further 28 scheduled to open by FY21-end (i.e. 116 in FY21 vs previous guidance for 102).

For its English Teaching division, IEL noted its Vietnam language schools are trading ‘as normal’, however Cambodian schools are temporarily closed due to government restrictions (online is continuing).

Second/third COVID waves creating short-term headwinds

The recent COVID-19 outbreaks in India provide a headwind to the recovery. We estimate that India accounts for ~40% of IEL’s IELTS testing revenue, which assuming 115k tests per month would equate to ~A$11.8m revenue and ~A$5.2m GP/EBITDA per month.

Additionally, recent border shutdowns to Indian outbound immigrants (e.g. Canada/Australia) does have the potential to impact Student Placement volumes, however the estimated financial impact is more difficult to ascertain given online vs physical starts.

Mapping out our forecasts

We have downwardly revised our IELTS testing assumptions, reflecting lockdown conditions in India and other regions.

We have also moderated our student placement volume assumptions, primarily reflecting delays to the Australian borders reopening and some 2H22 migration impediments during smaller Northern Hemisphere intakes. We now forecast FY21 EBIT of A$73.4m (-32% yoy), before rebounding to A$159.2m/A$221.7m in FY22/23.

The key swing factors in terms of the shape of recovery from here remain: duration of Indian COVID-19 lockdown restrictions; timing of Australian international borders opening (likely mid-2022); level of ‘pent-up’ IELTS demand to flow through; and the size of (historically smaller) university intakes in UK/Canada in 2H21.

Investment view – ADD maintained and new price target

We believe IEL is well-placed to capitalise on recovering international student demand via improved market share across IELTS/student placement. We note prior to COVID-19, IEL was delivering on its multi-destination student placement expansion well ahead of consensus estimates – a thematic we expect can return in time.

We continue to like IEL as a structural growth story with meaningful leverage to a global reopening. We believe earnings risk lies to the upside as pent-up demand levels are quantified, with M&A providing a potential further catalyst. ADD maintained.

Key risks: flagged Education Australia sell-down; further COVID-19 impacts; regulatory risk; competition; and IELTS agreement changes.

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