On 26 June the United States Supreme Court ruled in favor of the third version of the US Travel Ban, stating the [order] is expressly premised on legitimate purposes: preventing entry of nationals who cannot be adequately vetted and inducing other nations to improve their practices.
The decision was immediately followed by a wave of commentary from professional educators across the US that the decision would further deteriorate and already deteriorating situation – international student enrollment in the United States. In the 2016/2017 academic year when the first signs of trouble appeared, international students studying in the US contributed $37 billion to the US economy, according to NAFSA, an international non-profit association of educators.
Skeptics questioning the objectivity of professional educators with a vested financial interest in foreign student tuitions should take heed to similar concerns expressed by the business community.
The chairman of US based investment advisory firm Cumberland Advisors, managing $3 billion dollars in assets, had this to say about this key US export:
• “We are seeing the deterioration of a great American export. The U.S. is squandering a competitive advantage. And the buyer comes here to make the purchase and pays cash. We don’t have to ship a higher education anywhere. And school by school by school, we see a shrinking population of foreign students applying and coming to the U.S.
While there was considerable debate and confusion in the immediate aftermath of the US 2016 election regarding the status of international student enrollment in the US, the situation is now clear.
Multiple sources in the US are chiming in, including the following statistics from a June 2018 article in the prestigious Wall Street Journal (WSJ):
• In the year ended September 2017, the State Department issued 393,573 student (or F-1) visas, representing a 17% drop from the previous fiscal year and nearly 40% below the 2015 peak.
As always, some statistics can be confusing as is the case when international students seeking university degrees and those enrolling in intensive English language programs are lumped together. The US has benefited substantially from a full-scholarship for English language studies previously offered by the Saudi Arabian government, a program that has been scaled back.
Following the issuance of the first version of the US Travel Ban in January of 2017, opinion pieces speculating on the potential of hefty tailwinds propelling ASX stocks operating in the international student sector began to pop up on financial websites here.
Adding Brexit concerns from EU students studying in the UK to the mix could mean more tailwinds for Canadian and Australian companies.
Since then speculation regarding the US appears to have yielded to reality. Recognising the confusion surrounding some statistics, a review of available sources tells us enrollment in the US is down at least 4% while in Australia, international student enrollment – our third largest export commodity – is up 12%.
There are four ASX stocks in the sector, with two – IDP Education (IEL) and Redhill Education (RDH) – showing dramatic share price performance over the last two years.
Of the remaining two – Navitas Limited (NVS) and Academies Australasia Group (AKG) – only Navitas has seen negative share price performance.
The following table lists share price performance along with earnings growth forecasts and number of analysts covering the stock, where applicable.
Based on earnings growth forecast coupled with share price performance it would appear IDP Education stands as the most attractive target. However, investors intrigued by stocks flying “under the investing community’s radar” might be impressed with the low trading volumes and the share price performance of the two junior players in the sector – Redhill and Academies Australia.
Over two years Redhill’s share price is up 250%. The company listed on the ASX in 2010 with the share price rising 188% from its $1.20 first trading day close. Although Redhill derives more than 50% of its revenue from international students, the company also offers vocational education here in Australia, one of the few survivors in the aftermath of new government regulations following a student loan scandal that rocked the sector.
Redhill has grown to its current enrollment of about 4,000 students, according to the company website, with seven operating units.
Greenwich Management and English Colleges and Go Study Australia are the company’s primary offerings, with Go Study Australian offices in Italy, France, and Spain recruiting roughly 3,000 new international students enrolling in tertiary education courses across Australia each year.
Greenwich English College offers English Language Intensive Courses for Overseas Students (ELICOS), with a partnering relationship with Cambridge University’s English Language Assessment offerings. The Greenwich Management College offers vocational education courses, primarily to international students.
Redhill recently added four operating divisions devoted to vocational training education to its core offerings through the Academy of Information Technology and the International School of Design.
In 2015 Redhill launched an accredited Coder Academy along with online offerings in digital technology vocational training unit through the Left Bank; and Forge Faculty, a unique short-course online format incorporating elements of Redhill’s other vocational training colleges.
The company has grown revenue in each of the last three Fiscal Years, but profit stumbled in FY 2016 before returning to FY 2015 profit of $1.7 million, matched in FY 2017. Half Year 2018 Financial Results thrilled investors as revenues rose 44% along with profit of $1.3 million, a staggering 2,400% increase over the previous corresponding period (pcp).
Academies Australasia may be a thinly traded micro-cap stock, but the company states it serves more than 14,000 students representing 70 countries in its 18 colleges across Australia and in Singapore. Three of its colleges have been accredited to comply with the new VST (VET student loans) standards. The company prides itself in its 250 different qualification study areas offered in its network. Most of its students – 70% – come from overseas. The company offers pathway programs, allowing Academies students to advance to study at partnering institutions across Australia.
Half Year 2018 Financial Results showed a 6.3% revenue increase and a 340% rise in profit. The company pays a fully franked dividend, with a current yield of 1.4%.
Navitas Limited (NVT) was riding high from 2012 on a seemingly never-ending upward trajectory as the largest education service provider on the ASX, offering programs for both domestic and international students in vocational training, graduate degrees, and English language proficiency. The bottom fell out in 2014 when the market learned the company had lost one of its biggest pathway partners – Macquarie University.
The company’s recent financial performance does not reflect its reach and size – with more than 80,000 students with locations throughout Australia, as well as in North America, Europe, Africa and Asia. The company’s global network features more than 120 colleges and universities.
Half Year 2018 Financial Results showed a 6.3% decline in revenue and a 53.6% fall in profit, attributable primarily to the company’s closing some of its colleges.
Full Year 2017 Financials were similarly dismal, with a 5% revenue decline and a 10% fall in profit. Those results also reflected the closure of two of its colleges that were run by Macquarie University and Curtin University. Macquarie announced it would open its own pathway program. Navitas had been benefiting from the government-funded Adult Migration Education Program but lost some of its contracts, also dampening financial results.
There is an inherent risk in the pathway model. Navitas owned colleges offer courses needed for students deficient in the English language or certain academic areas to move on to a degree granting University or College – the partner institution at the end of the pathway. Given the rosy outlook for the international student sector, it is perhaps more surprising that other pathway partners have not followed Macquarie’s lead.
An additional risk of which potential investors should be aware is the quality of the pathway partner universities. Although precise statistics on the issue are hard to come by, some experts in the US are now claiming the top tier US universities, such as Harvard, Yale, and Stanford, are less likely to see significant drops in international enrollment as are tier 2 schools. Navitas has eight partners in the US and nine in the UK, with none widely considered as a tier 1 school.
Analysts have a consensus HOLD rating on shares of Navitas, with two at UNDERPERFORM and five at HOLD. Comparing one-year share price movements for Navitas and Redhill show Navitas hitting a downward trend while Redhill experienced the opposite.
This provides another possible explanation for Navitas’ continued struggles – competition. Once at the top of the heap, Navitas now has three competitors nipping at its heels. On the positive note for potential investors of Navitas is the company’s continued enrollment increases. Navitas has paid a fully franked dividend of $0.19 per share in each of the last three Fiscal Years, with a current yield of 4.3%.
IDP Education (IEL) was spun off from Seek Limited (SEK), listing on the ASX in November of 2015, closing its first day of trading at $3.25. The share price has risen more than 200% since coming on the ASX and was recently added to the ASX 200.
The company’s three operating segments focus exclusively on the placement of international students into English language schools in Australia, Canada, New Zealand, the UK, and the US.
IDP offers students a full range of placement services, paid for by the pathway college the student ultimately attends. IDP provides needed academic counseling as well as assistance in application processing and detailed guidance prior to the student’s departure.
The company operates English language training schools in Vietnam, Laos, and Cambodia. Finally, the company distributes and administers the internationally accepted test of proficiency in the English language, IELTS (International English Language Testing System.)
In its first year of operation the company reported revenues of $358 million and profit of $40 million. For the Full Year 2017 revenues increased to $390 million while profit rose to $42 million. Half Year 2018 results continued the good news for investors. Revenues increased 29% while earnings before interest, tax, depreciation and amortisation (EBITDA) was up 33% and net profit was up 22%, currency adjusted. In addition, the company reported increases in all its operating segments, with the largest (40%) coming from multi-destination (outside Australia) placement. IDP also reported “strong revenue” from its January of 2017 acquisition of Hotcourses, a UK-based operator of education search websites.
In June of 2017 IDP took a 20% interest in a Chinese provider of English language testing preparation materials, HCP Limited. In May of this year the company announced a partnership agreement with US-based Cognizant, a multi-national information technology firm. The goal of the partners is to distribute a global platform that “will connect and empower students, alumni, counsellors and universities via web, mobile, and social channels.” The platform has been launched in Singapore, with plans for introduction in all countries served by IDP placement services.
IDP operates 100 placement centres in 32 different countries. The company’s exhaustive list of US pathway partners includes more than 100 universities, with a handful that could be classified as near tier 1. In addition to the company’s presence with Australian Universities, the company has about 90 partner colleges and universities in Canada, another country set to benefit from declining US enrollment. However, location suggests Australia has an edge attracting two of the largest sources of students seeking an English language education – China and India. The Sydney Morning Herald reported for the enrollment period from July to December of 2017, Indian applicants for Australian schools rose 32% while Chinese Applicants were up 13%.
