Pinned straw:
Education services provider $IEL announced their 1H FY24 results today.
Overall a minor beat to consensus on revenue, EBIT and NPAT, however, from my perspective its a result that is strongly supportive of my investment thesis, which I'll discuss briefly below.
Their Highlights
- Record revenue of $579 million, up 15 per cent on H1 FY23, driven by strong student placement revenue growth of 44 per cent.
- Adjusted earnings before interest and tax (EBIT) of $159 million, up 25 per cent and adjusted Net Profit After Tax (NPAT) of $107 million, up 23 per cent, demonstrating strong operating leverage in the business model.
- Record student placement volumes of 57,300, up 33 per cent.
- English language testing (IELTS) volumes of 902,000, down 12 per cent.
- English language teaching volumes of 51,600 courses, up 15 per cent.
My Analysis
So first, the bad news, and there is some.
Testing took a hit due to a significant slowdown in India, particularly wth respect to the Canadian market. This reflects increased competition, economic and sentiment factors, and rules changes. Without India, IELTS volumes grew 17%, with $IEL noting that the testing network spans 87 countries. At it is, IELTS revenues fell 5%.
Good news - Student Placements. Placement revenues grew strongly up 44%, with volumes up 33% and with pricing increases on top. This is the thesis-supporting result. Student placement and the suite of services around it represent the core part of the $IEL offereing where it can differentiate itself. And in an environment where governments across the board are tightening up on student admissions and visa approvals, what is an industry headwind is perhaps allowing quality providers like $IEL to take market share. Given their low penetration of the markets in Australia, Canada, UK and USA, to achieve 44% revenue growth is encouraging. Of course, the environment has changed significant over the last year and indeed over recent months, so it will be interesting to see to what extent this kind of performance can continue through H2 FY24 and into FY25. But so far, so good. I call out some more detail on this below from the presentation.
The rest of the financials looks, at first glance, to be a good story of reasonable operating leverage. Total expenses have been reasonably well controlled at +13% below revenue growth.
Interest at $11.3m is up 70% reflecting higher rates and the higher debt being carried as a result of the acquisitions of Intake (in FY23) and the smaller acquisition of Ambassador in May 2023, which gives a small, unquantified boost to the Ohter Student Services.
On the cash flows, there were strong investing cash outflows for the acquired business deferred considerations ($22m) and opening of 11 international offices (PPE $8.5m) and investment in the technology platforms (intangibles of $19.3m).
Operating Cashflow was actually quite weak, almost flat on the prior period. There is nothing remarkable on receipts and payments (in line with the financials). The big difference is on cash taxes paid, which at $52m (up 67%), so this will be a timing issue and, as there has been nothing untoward on recent reports on taxes reported in the P&L, I'll just make a note to look at this at the FY.
On the balance sheet, while borrowing rose from $209m to $285m to fund acquisitions and expansions, net debt to EBITDA is modest at about 0.83 (144/173) by my estimate.
Student Placements - a deeper dive
I include 2 charts from the presentation on students placements. They speak for themselves.
In the context of low market penetration, in a more challenging environment, $IEL as a quality provider is well-positioned to take market share. This is a service where quality (incl. chances of success in getting a Visa approved) can be a very strong reputational driver.
My Key Takeaways
Good results in line with my thesis. However, like most analysts I didn't quite foresee the strength of placements and the weakness of IELTS.
My previous valuation of $IEL is $24-25. Today's result probably lifts that slightly, although some caution is advisable given the industry headwinds. So, I'll probably sit with the valuation unchanged until the FY result is in.
I suspect we'll see a positive market reaction today to the result, so I will await the next price weakness opportunity, as I'd like to increase my holding.
Disc: Held in RL, not on SM
Investment Decision
I'm very surprised by some of the commentary on the $IEL result over the last day. In fact, some talking heads have been lining up solidly with the shorts.
Some of the government tightening on education visas and student flows is part of the macro-cycle. When unemployment is rising, it is politically convenient for governments to turn back the supply of cheap labour that comes with large student flows. Equally, cost of living pressures makes it less attractive for students from middle income countries to come to USA/Canada/UK/Australia. So, I see a cyclical factor at play here.
However, even despite these issues, quality service providers will gain share and strengthen their market position.$IEL is such a business.
So, as a result, in RL (with $IEL down 6.4% today at time or writing), I am topping up my $IEL position in RL.
Disc: Held in RL
(Note: I tend not to hold quality, proven companies on SM. For a list of my RL holdings not on SM see my profile)
"When unemployment is rising, it is politically convenient for governments to turn back the supply of cheap labour that comes with large student flows."
This is exactly the issue IMHO.
A significant proportion of "international students" are nothing of the sort. All those people cycling erratically on our roads in an Uber Eats outfit are "international students"
There is an extensive industry supplying these people with bogus education so they can get a visa and hence earn hard currency to send back home. I have nothing but admiration for the hard work and sacrifice they have to put up with. But that tap is being turned off. My wife works in the immigration medical industry and can attest to a significant increase in knockbacks. This is predominantly for applicants from the Indian Subcontinent, Chinese students tend to be much more affluent and come to learn and experience life outside of China.
I had not previously considered IEL for this very reason. It seems likely though, that IEL services the true student rather than the migrant worker student and consequently may continue to kick goals.
If anyone enjoys a good book, I couldn't recommend this highly enough:
Short listed for the Man-Booker prize in the UK - it tells the story of exactly these "international students". Fantastic.
Following the opening of my recent small position, I’ve started my much deeper dive to further assess $IEL.
The first place to start was the big drop in IELTS (language testing) which has predominantly been in India (according to the H1 presentation … India volumes down 31% but other key growth markets up 17%).
Stepping back, IEL’s ultimate success is really going to be based upon the economic growth (international education will be an indicator) of economies such as China, India and SEA. My hypothesis is that China’s growth will be pretty subdued due to geopolitical and macro factors (why spend money to study abroad when there is massive youth unemployment, repercussions of one child policy mean less university age population, etc …) so the key growth driver will be India (a little behind China on its emergence as an economic power so likely to continue to have catch up growth).
This hypothesis is supported by the following data ( really worthwhile read) with the following highlights:
- China to peak by 2027 and then stagnate or decline
- Indian enrolments expected to double from 1m in 2019 to 2m in 2025
- 1 million Indians turn 18 every month
- A huge amount of the India dip seems to be driven by diplomatic spat between Canada and India (Canada reduced Visa processing officers in India from 27 to 5) and some crack down from Australia around fraudulent applications …
https://monitor.icef.com/2023/11/how-is-indian-student-mobility-changing-in-2023/
I also found the following (UK view) macro-centric study pretty interesting. Strong correlation between GDP growth and international student growth … so some short term slow down as we bump through these recent high inflation / mild recession factors from the COVID stimulus hangover could also be expected to dampen $IEL results for short term investors.
The website also has quite a lot of detailed articles on what’s going on with Canada’s Higher Ed market … bottom line, they have reduced visas by 35% for 2024 and 2025 (Canada has been a popular destination for Indian students).
https://monitor.icef.com/2024/01/canada-announces-two-year-cap-on-new-study-permits
My next deeper dive … “So where are these Indian students going to go and how does $IEL continue to grow revenue from them?” … to paraphrase … I reckon they are headed to the USA and how well can IEL tap this market quickly and get relationships with institutions up and running to make up for what looks to be a Canadian revenue gap.
https://monitor.icef.com/2023/11/us-increases-visa-handling-capacity-in-india/
