By Leo Sek – Clime Asset Management
Navitas Limited (ASX: NVT) is a global education provider offering a range of educational services for students and professionals. NVT operates throughout Australia, Asia, India, Pakistan, the UK, France, Turkey, Canada, Africa and Colombia.
On a first appraisal the company has excellent financial statistics and dynamics. However, as we shall see the market has a very high expectation of financial performance to justify its current share price.
NVT has four operating businesses:
– University programs, representing 83% of EBIT
– English, representing 14% of EBIT
– Workforce, representing 3% of EBIT
– Student recruitment, representing less than 1% of EBIT
NVT’s core business is the offering of university pathways and managed campus programs through 19 colleges and 4 managed campuses in Australia, the UK, Canada, Singapore, Sri Lanka and Africa.
Pathway colleges offer programs to students who need to complete a bridging course or secondary education before they can enter university. Colleges operate through long term agreements with universities where the university allows successful students to enter its degree programs.
Managed campuses are agreements with universities where NVT recruits, administers and operates subsidiary campuses of a university. Campuses are currently located in Sydney (ACN, Curtin Sydney and Macquarie City) and Singapore (Curtin Singapore)
Revenue is driven by student enrolment numbers, tuition fees and the number of Pathway managed campus agreements signed with universities.
NVT sources its students largely from a network of agents and pays a commission of roughly 9% of student fees. NVT also pays the university a royalty of approximately 26% of student fees paid. Lectures are contracted on a semester basis depending on student numbers.
The English division offers English language courses to international students, migrants and refugees through brands such as ACL, ACE and HELC. NVT is the largest private provider of English language programs in Australia. NVT also trains English language teachers.
NVT provides English language courses to migrants and refugees in partnership with public, not for profit partners through funding from the Federal Government.
Workforce delivers training to employees to make them work ready with the relevant tertiary and vocational skills. This division was created through a number of acquisitions over the past four years.
Customers in this instance are employers. NVT uses contract labour to deliver the training. A diverse range of programs are offered including: counseling, psychology, social science, business, IT, public safety and healthcare.
Student recruitment recruits students from China, India and the UK to study at universities in Australia, US, Canada and the UK, including colleges operated by NVT.
In addition, this division provides migration and employment advice services to international students.
Regulatory reforms to migrant and refugee intake laws are a key area for NVT given its exposure to international students. Recently, the Federal Government announced a revamp of the skilled migrant list. For instance the announced intention was to replace hairdresser type jobs with opportunities in medicine. If a job for which the foreign student is studying is not available then the student will not be able to apply for permanent residency visa unless there is an employer sponsor. This will undoubtedly require changes to be made to NVT’s operations and may lead to a short term decline in revenue as NVT adapts to these changes.
Another regulatory risk would be if the Federal Government reduces its refugee and humanitarian intake. Lower refugee and humanitarian entrant numbers will negatively impact English division revenue.
Recent press coverage of attacks on Indian students in Victoria may have an adverse impact on international student enrolment numbers. This may affect both University Programs and English division revenues.
NVT is clearly an industry leader in the Australian education market which has experienced rapid growth in recent years. However as it expands offshore, there may be risks to operating in unfamiliar educational and regulatory environments. Also there is the risk in competing with the incumbent education providers.
The stronger Australian dollar may increase the pricing of NVT’s Australian services and encourage international students to choose offshore competitors.
NVT displays the hallmarks of a good business:
• year on year profit growth
• trend of rising and consistently high return on equity (ROE)
• very little new equity capital raised
• high dividend payout ratio
A black mark against NVT is that it has negative tangible assets due to a high level of goodwill from the acquisition of businesses. This goodwill may be written down if the acquired businesses do not perform as initially expected. This will have the effect of decreasing equity per share and reducing NVT’s value.
We have adopted a required return of 14.0% which is appropriate given the high regulatory risk the business faces.
The adopted profitability forecast of 90% is conservative given NVT’s demonstrated ability to sign new college agreements with overseas universities. The market requires 190% profitability to justify the current price.
We regard the profitability level required by the market as extremely high and the stock is overpriced by the market. We would wait for the market price to return to around $2.00 before becoming interested in the stock.
Clime Asset Management and StockVal are part of Clime Investment Management (ASX:CIW).
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