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Bull thesis for $IEL in 3 points
I would structure my lukewarm bull thesis for $IEL in three ways:
#1 Regulatory downside is better priced in at $21/share (nearing 2yr low)
The introduction of new competition into Canadian market could = 600k p.a. less IELTs test (at $280 a test). However no one knows how successful the competition will be at picking up share against IELTS
CEO transition has taken place and Barkla is staying on as a NED.
#2 Hoards of cash are less likely to be blown up based on M&A track record
I am not a fan of buying a stock for its M&A potential, however, given the relatively small pool of scaled placement businesses this has less risk. Their targets would likely be a biz which have
>5% of placement market
operate in a location that $IEL are interested in (likely UK or US)
Arguably the harder M&A piece (growing their India business) has been largely completed
#3 There remains pockets of unregulated pricing upside in $IELTS
Understandably most sellsider brokers focus on the placement business as the growth engine
However IELTS volumes grew at 19% p.a. to 2019 and their prices grew in A$ terms at ONLY 1% (mainly due to a bigger skew to countries with cheaper tests)
As a market leader, I think IELTS could continue to increase prices in dominant countries (i.e. India/Australia) beyond this level (at 4% or above). Furthermore - if the 19% volume CAGR persists - the incremental revenue from higher price rises could materially enhance earnings
History of IDP Education - The important parts to know
$IEL is a leading global provider of education services. The vast majority of the company’s earnings are generated in two pillars:
IELTS- 30% market share. 19% CAGR. Most regulatory risk
Student Placements - Market share is 7-10%. Less regulatory risk
In 2006, Seek acquired a 50% stake in the business for $36m (with the remaining 50% held by the universities). $IEL was then spun out of Seek in 2015, which they sold on-market for >$360m, and $IEL has gone on to outgrow $SEK by quite a margin as well as their publisher-now-educator competitors - Pearsons PLC.
From IPO to 2022, $IEL grew aggressively driven by the transformation from an analog-based operating model to a digital platform-based business. A lot of this growth was driven by CEO Andrew Barkla who now sits-on as a NED.
Today - IELTS is less of a focus. The focus is to (a) evolve the student placement business into multiple locations and (b) broaden the wider range of educational courses.
$IEL has regulatory overhang - how does this impact $IEL multiple?
When I very first looked at $IEL in 2017, I thought that it should attract a multiple similar to $MMS (i.e. a business facing regulatory risk). This was due to
Large regulatory overhang (as evidenced by Canada English testing)
Evidence of network effects with not much fragmentation
High single-digit margin
However, implying $IEL is a similar business to $MMS would be doing $IEL a huge disservice because (a) $IEL have more geographic exposure beyond Aus - mainly US/India/UK/Canada, (b) their model can scale more easily in future countries (c) they have demonstrated margin expansion from 10% to 15% (unlike $MMs and indeed its peer Pearsons)
So simplistically - whilst the 33x forward multiple is high it should be calibrated with the fact:
EPS will grow >15% p.a. (after pricing in the EPS drop from Canada
Net debt is nil given their large cash holding and runs a favourable NWC cycle
They have a near-monopoly in some areas (e.g. parts of India business)
Historical ROE is >20%
It is trading at a relative lows
1 standard dev below 5yr Average multiple
1.3x Index Average multiple (compared to usually c2.0x Index)
Operational benefits of $IEL compared to others
There are a few decently large competitors (e.g. Pearsons/Navitas etc) however their growth has been linked to providing certain customer needs
IELTS
Bigger reach The primary benefit is (a) IELTs is accepts at more schools than PTE and (b) their blend of in-person and electronic tests is well likely by universities
India: In 2021 IDP acquired British Council’s operations in India. This was a transformational acquisition as it gave IDP a monopoly in what has become the most important source market in the world for Student Placement volumes.
Student placement
Integrated agent model works: Whilst they are not the only ones doing it - $IEL has services like course selection, application advice, and event management which provide it some edge.
App has been successful: ‘IDP Live’, a student-centred app was launched with take up of >1 m downloads and a 4.5 star rating on the App Store
$IEL has relationships with highly ranked institutions - their size and data analytics capability means they have good relationships with many institutions with good rankings and on-campus experiences (albeit so do some of their competitors)
Hotcourses enhanced search/marketing function: One of the game-changing deals that happened was in 2017 when $IEL acquired Hotcourses for GBP30m. Now branded IDP Connect, this 'education search engine' added the client relations and marketing teams, which work with the placement business
Universities get >4yrs of income from 1yrs fee: $IEL receives commission based on a % of the student's first-year tuition. Which is compelling for unis given the average >3yr length of most degrees
Whilst there are instances where this process can be run in-house (e.g. Macquarie University) the majority of universities' still use placement businesses
Short-term outlook - Pearsons guiding strong 7-10% growth in Canada & flagging Aus slowdown
$PON's most recent earnings showed:
Full-year English Language Learning (ELL) growth =>25%
Aus Placement business - Tailwind from Gov policies to slowdown in H2
Canada - Pearsons will spend big to win a share in Canada now $IEL monopoly has rolled over
Guided for high single-digit growth in the ELL in Canada
Pearson Test of English (PTE) remains particularly strong (stronger in Canada than Aus)
Overall NPAT = high single-digit growth in FY24
Longer-term Qualitative Factors - Whilst mgmt is questionable they are well positioned in India and Africa growth areas
CEO yet to prove capital allocation skills: There is always nervousness with a new CEO. Unsurprisingly my main issue with Tennealle is that she ran a super-aggressively priced IPO in Adore Beauty which hurt investors badly & Barkla knew the business inside out. As such, I hope that my fear is disproved by good capital allocation
PSWR is here to stay: $IEL has benefitted from Post Study Work Right (PSWR) reform introduced by various governments, namely the UK and Canada, as these countries look to attract more skilled migrants. There could be additional upside if this is adopted by US/AUS
Competition will come online but takes time: I think what happened in Canada (more comp in testing) will continue in other regions but it takes time given the fragmented nature of the university sector
Africa is the obvious growth corridor: Recently IDP acquired Intake Education, which provides placement services across various region in Africa and Asia. Nigeria has long been identified as a growth market for $IEL, and this acquisition lifts penetration in a market that is the 3rd largest source of students to the UK.
Longer-term DCF inputs - FY23's topline & expenses were abnormally high. IELTs price growth & non-Aus placements are the areas where consensus could be wrong
There were several factors which muddied FY23 performance
Record growth in IELTs growth offset by >33% opex growth
Large financing lease costs
Large amort charge recognised from acquisitions
From FY24 onwards, there could be 600k pa reduction in IELTs tests in Canada which I have shown by normalised growth in FY26
Below is how I see segmental and operational growth going forward
Conclusion
At the A$5.9bn market capitalization - this equates to an FCF yield (excluding finance lease) of 3.3% in FY24.
This is not compelling in isolation, however, I will slowly start accumulating a position as this edges toward a 4.0% FCF yield (A$5bn mkt cap or $18) given:
The Canadian market disruption is priced in
The strong positive net cash position offers management optionality
This is a historically low multiple and there is a risk it does not get to $18
Whilst this is not incredibly precise, compared to how I would approach assessing some other companies, I think one must temper their expectations with the level of growth this business has seen (i.e. growing NPAT from $70m to $150m in just 4 yrs
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