The boom in international education in Australia is expanding. Lead by Chinese enrolments, student volumes grew 12 per cent in the past year, recent government data shows.
That is a remarkable gain and further confirmation that our international education sector has a long way to run. Australia is hosting record numbers of international students and they make up more than a quarter of enrolments at some universities.
Chinese students account for almost one in three international students in Australia – a market that will expand as more Asians join the middle-class and seek Western education.
Then there’s rising demand from Cambodia, Myanmar and other emerging nations, albeit off a lower base, for our universities. About 540,000 international students now study at our universities, private colleges, schools or English-language centres.
For all the challenges, international education has been one of Australia’s great export success stories and will remain so for many years.
It’s a shame there are few ways on ASX to play this trend. Our market had several vocational education training (VET) providers that were leveraged to the international-education trend, until some unscrupulous operators went bust and tarnished the listed VET sector.
IDP Education and Navitas remain the pick of our listed education sector. Most others are too small or inconsistent to get excited about (online education provider 3P Learning is an exception as its recovery continues).
IDP provides student-placement services to universities in Australia and overseas, and English-language testing services through the IELTS program. IDP has starred since its November 2015 float, soaring from a $2.65 issue price to $7.58 after a string of profit upgrades.
Chart 1: IDP EducationSource: The Bull
I have written favourably about IDP since its float, for The Bull. The stock is not cheap after share-price gains this year, but it is superbly leveraged to growth in international education and demand for English language-testing services.
In contrast, I have avoided Navitas in the past few years. Navitas provides pre-univeristy pathway programs where students, mostly from developing nations, do bridging courses before undertaking a full degree. Navitas owns the SAE media technology institute, which operates in 26 countries, and it also offers employment and English language testing services.
Navitas was once a market darling. A 10-year annualised total return (assuming dividend reinvestment) of 13.6 per cent shows the quality. But the return over five years as been slightly negative as Navitas has downgraded earnings and disappointed investors.
Navitas’ interim result in February underwhelmed: the stock fell 9 per cent on the news even though it broadly met several analyst forecasts. The cessation of the share buyback program and move from fully to partially franked dividends may have spooked investors.
University contract renewals and regulatory risks from government, which can change policies for international education and migration, are key risks. Navitas is arguably a more complicated, riskier stock than IDP given the diversity of its services.
But every stock has its price. Navitas has fallen from about $5.60 late last year to $4.35. For all the recent disappointment, Navitas still has an excellent position in its market.
Chart 2: NavitasSource: The Bull
The company also has a growing global footprint thanks to successful partnerships in Asia, the UK, US and Australia. It is an obvious beneficiary from rising demand from Asia for Western university education.
Moreover, Navitas has relatively low capital requirements. That enables good cash flow in the business and relatively high dividend payout ratio. The flipside is lower barriers to entry and increased competition; universities, for example, could provide their own pathway programs as Macquarie University in Sydney did.
Still, Navitas has more than 30 university partnerships and thus diversified exposure. Also, universities here and overseas continue to rely on third-party providers for pathway programs. More likely is universities squeezing third-party providers for better deals upon contract expiry – a move that could weigh on Navitas’ margins and profitability.
At $4.30, Navitas trades on a forward Price Earnings (PE) in FY19 of about 19 times and is expected to yield around 4 per cent. An average share-price target of $4.56, based on the consensus of eight broking firms, suggests Navitas is marginally undervalued.
The consensus view looks reasonable. As the market pays a sharply higher valuation of IDP, it is time to put Navitas on portfolio watchlists as it approaches value territory. Navitas looks on track for a stronger FY19 as it puts contract losses behind it and after senior management changes.
As so often happens, the market relegates former stars to the doghouse when they disappoint and overlooks their recovery and improving value. The same trends driving IDP are helping Navitas, not that you’d know it by the share-price divergence this year.
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at April 24, 2018.