Change in substantial shareholding notice from Challenger. They are up to 26m shares, buying 3m at a time every month or two for the last few months.

the optimist in me suggests that Challenger think that the 2% dividend will increase over time with profits (as per analyst predictions) and they are unconcerned with the risk of visa issues curtailing profits.

I like some of the commentary around this company. The thesis is that universities will pay for quality candidates. But over 10% of the company is shorted, and government policy is restricting visa issuance, which creates uncertainty. It may be that the thesis plays out and revenue and profits continue to grow as expected, but in the meantime I think Mr Market is not prepared to pay as high a multiple, and it will trend downwards for a bit.

GS have a PT on $IEL at $27.60, not yet updated as the below is a "First Take" - broadly in line with my remarks, although they have also called out the pricing strength.

Here's there summary takeaway issued recently.

"GS Take: We expect investors to react positively to IEL’s 1H24 result. IEL’s strong performance in student placement, through a period where aggregate student visa volumes are already softening, should in our view begin to build the case for market share to drive continued SP growth despite regulatory tightening. IELTS was a touch softer and we remain of the view that the Canada visa cap is likely to have a greater impact on IELTS than SP. That said, IEL’s impressive price increases in both SP and IELTS are a handy offset, while costs may be managed relatively lower in the 2H in line with the revenue outlook - helping to support achievement of full-year consensus expectations, in our view. Buy."

IDP Education is the 5th most shorted stock on the ASX with short positions on 10% of its shares. Today, following a good 1H24 result, there might be some nervousness amongst the short sellers which is helping to fuel the higher share price (up 10% at time of writing). Sometimes higher prices lead to higher prices, and we could see a short squeeze on IEL shares. It will be interesting to see how this plays out.

Source: Shortman.com.au https://www.shortman.com.au/stock?q=IEL

Education services provider $IEL announced their 1H FY24 results today.

ASX Announcement

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

IDP Education (IEL) has just released a solid result for 1H24.

• 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)ii 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.

At this stage IEL are tracking ahead of analyst expectations with NPAT of $97.4 million ($107 million adjusted) and consensus of $173 million for FY24. However I am expecting the changes in Canada to make the second half a little tougher.

Management said “ the decrease in IELTS volumes of 12 per cent was due entirely to lower volumes in India, partially offset by increased volumes in other high-growth markets. The decline in Indian volumes was due to weaker industry conditions, increased competition and lower repeat testing rates for Canada.

The weaker industry conditions reflect a period in which international student demand was impacted by a decline in sentiment towards Canada, rule changes for student and dependent visas in the UK and an increase in visa rejection rates for Australia.

“Outside of India, IDP recorded IELTS volume growth of 17 per cent. This performance reflects IDP’s diversified global testing network which spans 87 countries and includes key growth markets for English-language testing. Our focus for English Language Testing continues to be on strategic investment in network expansion, multi-modal delivery, and product innovation,” Ms O’Shannessy said.

Quote ends.

Hopefully the market will react positively today. I’ve been accumulating IEL in IRL and on SM. I accept that in the short term there are a few headwinds facing this business, but I think the headwinds are short term and I am very bullish for continued growth in the long term. Will continue to add IRL on weakness.

A quick overview for now ahead of the market opening, but I’m expecting the market will be reasonably happy with the result today.

Held IRL (4%), SM (15%)

The Canadian government has introduced a temporary two year cap on International student visas. Here’s a quick summary below:(https://monitor.icef.com/2024/01/canada-announces-two-year-cap-on-new-study-permits/ , 22nd January 2024)

• Canada will establish a cap on the number of new study permits issued to international students
• The cap will be in effect for 2024 and 2025, and is described as a temporary measure
• Canadian immigration officials anticipate that the cap will result in a 35% reduction in the number of new study permits issued in 2024, compared to 2023 levels
• In addition to the cap, the government also announced today that as of 1 September 2024, students enrolled in programmes delivered via public-private partnerships will no longer be eligible for post-graduate work permits
• The government will also move to limit open work permits available to spouses of international students
• However, post-graduate work rights will be expanded for students completing graduate studies in Canada, with such students soon being able to apply for a three-year post-graduate work permit

My Take

To date I haven’t heard any comments from management at IDP Education (IDP) however it can’t be good news for IDP, particularly on top of the Immigration, Refugees and Citizenship Canada (IRCC) announcing the approval of several other English language tests (CAEL, PTE Academic, TOEFL iBT and CELPIP General) for the Student Direct Stream (SDS) visa program starting from 10 August 2023 (https://bellpotter.com.au/ideas/idp-education-iel-stiff-competition/)

Previously, only IELTS was accepted. SDS is an expedited study permit process for students applying to study in Canada from ~14 countries. In 2022 IRCC finalised ~739k study permit applications. Bell Potter estimates that ~45% of these are via the SDS and the test is taken ~1.7x on average equating to ~500-600k IELTS exams p.a.

Bell Potter has assumed IDP could lose approx. 30% of the SDS market in making adjustments to their forecasts (https://bellpotter.com.au/ideas/idp-education-iel-stiff-competition/).

Importance of the Canadian market to IDP?

IDP provided the following graph in their FY23 Financial Results Presentation (https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02700602-3A623946)

During FY23 Canada made up 24% of the enrolments by destination.

If we assumed the Canadian market will be reduced by 35% due to the temporary cap (Canadian Immigration Officials estimate) , and IDP loses 30% of the reduced intake numbers (Bell Potter’s assumption), we could expect the Canadian market to decline by approx 45%. Using some rough assumptions and some even rougher maths, this could possibly result in a 10% hit to FY24 earnings. However, Canadas’s loss will most likely be another country’s gain, and the two year Canadian cap could end up having little impact at all on IDP’s earnings. We also need to take into account earnings growth in other markets which could offset any losses in the Canadian market. The other thing to consider is this is a two year temporary cap, and the total market could be back to normal two years time. I think this is just a hiccup for investors with a long term perspective.

Summary

It’s difficult to estimate what impacts recent changes to the Canadian market will have on IDP’s bottom line, but I think the worst scenario is a 10% impact to IDPs earnings. However, the rest of the world is still growing and I expect other education destinations will adsorb most of the Canadian visa cap losses. Half of these losses (visa caps) are temporary and the Canadian business could be back to normal in two years time. I expect double digit earnings growth to continue despite the Canadian set backs.

I think this is a unique opportunity to build a position in this wonderful business at under $20 per share. The price could fall further though as short selling is likely to continue following the Canadian visa cap announcement. With short positions now over 10%, IDP is currently the fifth most shorted stock on the ASX and it’s never an easy ride betting against the short sellers.

Held IRL (1.8%), SM (14%)

Inside Ownership                   Ordinary Shares          Net Value at $21.00

Peter Polson 50,0000 $1,050,000

Ariane Barker 21,684 $455,364

Greg West 27,817 $584,157

Chris Leptos 28,684 $602,354

Professor Colin Stirling 2,517 $52,857

Tracey Horton 2,200 $46,200

Michelle Tredenick 5,500 $115,500

Andrew Barkla 75,000 $1,575,000

Total 213,402 $4,481,442

*Total Insider Ownership under 1% total shares issued 

Recent Management Buying

Buying 18 Dec 23 Michelle Tredenick            3000 Shares at $19.73 ($59,190)

Buying 28 Nov 23 Tracey Horton                    500 Shares at $21.63 ($10,815)

Buying 10 Nov 23 Tracey Horton                    500 Shares at $23.45 ($11,725.92)

Buying 28 Sep 23 Colin Stirling                       1850 Shares at $21.52 ($39,818.76)

Management Bios

Peter Polson - Non-Executive Director and Chairman

Peter was appointed Non-Executive Director and Chairman of IDP Education in March 2007 and became Chairman of IDP Education Limited when the company was listed on the Australian Stock Exchange in November 2015.Peter has broad experience in the financial services industry, first as Managing Director of the international funds management business with the Colonial Group, then as an executive with the Commonwealth Banking Group with responsibility for all investment and insurance services, including the group’s funds management, master funds, superannuation and insurance businesses and third-party support services for brokers, agents, and financial advisers. He is currently Chairman of Avant Group Insurance Limited and Very Special Kids. Until October 2022, Peter was Chairman of Challenger Limited (ASX: CGF, listed company director from November 2003 to October 2022) and Challenger Life Company Limited. Peter is also a Director of Avant Mutual Group Limited, Avant Group Holdings Limited and Copia Investment Partners.

Ariane Barker - Non-Executive Director

Ariane was appointed as a Non-Executive Director of IDP Education at the completion of its IPO in November 2015 and is Chair of the Audit and Risk Committee.Ariane is a Board Member of Commonwealth Superannuation Corporation (CSC) since September 2016, where she chairs the Governance Committee, is a member of the Remuneration and HR Committee and chairs ARIA Co Pty Ltd (a subsidiary of CSC). She is also a member of the Investment Committee at the Murdoch Children’s Research Institute since 2011; and a former Board Director of Atlas Arteria (ASX: ALX, listed company director from March 2021 to December 2022) and Emergency Services & State Superannuation (ESSSuper). She has extensive experience in international finance, risk management, debt and equity capital markets and venture capital, with over 20 years in senior executive roles at JBWere (part of National Australia Bank), Merrill Lynch, Goldman Sachs and HSBC in the United States, Europe, Japan, Hong Kong and Australia. She was previously the CEO of Scale Investors from 2017 to February 2021. Ariane is Fellow and graduate member of the Australian Institute of Company Directors (AICD).

Professor Colin Stirling Non-Executive Director

Colin was appointed as a Non-Executive Director of IDP Education in February 2018.He is the President and Vice-Chancellor of Flinders University and brings more than thirty years of experience in international education in Australia, the UK and the USA.Colin is a Director of Education Australia Limited and has held various other board positions across health, academic and community organisations.Educated at the University of Edinburgh and with a PhD from the University of Glasgow, Colin began his award-winning scientific career at the University of California, Berkeley.

Greg West Non-Executive Director

Greg was appointed as a Non-Executive Director of IDP Education in December 2006. Greg is on the Council of the University of Wollongong and a Director and Chair of the Audit Committee of UOWGE Limited, a business arm of the University of Wollongong with universities in Dubai, Hong Kong and Malaysia. Greg is also a Director and Chair of Education Australia Limited and Education Centre of Australia Limited and Director of St James Foundation Limited and Fertoz Limited (ASX: FTZ, listed company director since February 2022). Previously, Greg was Chief Executive Officer of a dual-listed ASX biotech company. He was also formerly a Director of Tiny beans (ASX: TNY, listed company director from March 2022 to October 2022). He has worked at Price Waterhouse and has held senior finance executive roles in investment banking with Bankers Trust, Deutsche Bank, NZI and other financial institutions. Greg is a Chartered Accountant with experience in the education sector, investment banking and financial services.

Chris Leptos AO Non-Executive Director

Chris was appointed as a Non-Executive Director of IDP Education at the completion of its IPO in November 2015. Chris is also the Chairman of Summer Foundation, Chairman of Summer Housing, and the Independent Reviewer of the Food and Grocery Code under the Competition and Consumer Act. He was previously a Senior Partner with KPMG and Managing Partner Government at Ernst & Young where he had national responsibility for leading the public sector and higher education practice. In 2000, he was designated a Member of the Order of Australia for services to business and the community, and in 2022, he was designated an Officer of the Order of Australia for services to the public sector and education. Chris is a Fellow of the Institute of Chartered Accountants and a Fellow of the AICD.

Tracey Horton, AO Non-Executive Director

Tracey was appointed as a Non-Executive Director of IDP Education in September 2022. Tracey is an experienced company director with extensive international experience in leadership and senior management in the education industry and management consulting.She is currently a Director and Chair of the Remuneration Committee of the GPT Group (ASX: GPT, listed company director since May 2019) and is on the board of IMDEX (ASX: IMD listed company director since November 2023). She is a Non-Executive Director of Campus Living Villages Pty Ltd and Acting President of the Australian Takeovers PanelTracey has previously served on the Boards of leading listed companies, including as Chair of Navitas and Non-Executive Director at Automotive Holdings Group, Skilled Group and Nearmap. She has held several leadership roles in the not-for-profit sector, including President of the Chamber of Commerce and Industry of WA and Deputy Chair of the Australian Institute of Company Directors.

Michelle Tredenick Non-Executive Director

Michelle was appointed as a Non-Executive Director of IDP Education in September 2022.Michelle is a company director with extensive experience in businesses operating in a broad range of industries, including banking, insurance, wealth management, education services, health insurance, superannuation, and technology. She also runs her own corporate advisory business advising boards and CEOs on strategy and technology. She currently serves on several listed and private company boards. She is on the board of Insurance Australia Limited (ASX: IAG, listed company director since March 2018), Urbis Pty Ltd, First Sentier Investors Holdings Pty Ltd, and Zafin Labs Americas Inc. Michelle served as a Non-Executive Director of the Bank of Queensland (ASX: BOQ, listed company director from February 2011 to September 2020), Cricket Australia from 2015-2022 and was also formerly a director of the Ethics Centre and a Senate Member of the University of Queensland.

Andrew Barkla - Non-Executive Director

Andrew was appointed as a Non-Executive Director of IDP Education on 12 September 2023. He has extensive experience in the technology, services, and software industry, with more than 20 years of senior management experience in roles across Australia, New Zealand, Asia and North America. Andrew was CEO and Managing Director of IDP Education from August 2015 until September 2022. Prior to joining IDP Education, Andrew worked for SAP as President of Australia and New Zealand. Before this, he held leadership roles at Unisys, including Vice President of Unisys’ Asia Pacific Japan operations covering 13 countries, Member of Unisys’ Global Executive Committee, and Chairman of Unisys West: a technology services joint venture between BankWest and Unisys. Earlier in his career, Andrew was Vice President and General Manager of PeopleSoft’s Asia Pacific region prior to the company’s acquisition by Oracle. Andrew is currently Chair of Capsifi and on an Advisory Board Member at Guroo Learning

$IEL announced their FY23 results today.

Their Highlights

• Record revenue of $982 million, up 24 per cent vs FY22; driven by strong student placement revenue growth of 63 per cent vs FY22.
• Adjusted EBIT* of $228 million, up 40 per cent vs FY22 and Adjusted NPAT* of $154 million, up 45 per cent vs FY22, demonstrating strong operating leverage in the business model.
• Record student placement volumes of 84,600, up 53 per cent vs FY22, driven by the Australian market growing 77 per cent vs FY22, and other study destinations growing at 39 per cent.
• Record IELTS volumes with 1.93 million tests administered by IDP during FY23.
• English language teaching course enrolments of 94,300, up 35 per cent vs FY22.
• Final dividend declared of 20 cents per share taking full-year declared dividends to 41 cents per share, which is an increase of 52 per cent vs FY22. 

My Analysis

A strong result but, with today's "trigger happy" market, this is a marginal miss, so who knows what's coming:

• NPAT = $149.1m vs consensus $153m (-2.5%)
• EBIT = $220.7m vs consensis $227m (-2.8%)
• EBITDA = $271.2m vs consensus $274m (-1.1%)

"Consensus" depends on your dataset. Mine is marketscreener.com (n=9 to 13 depending on the metric)

Overall, it is a strong performance on volumes and pricing, with revnue up 23% y-o-y on a constant currency basis.

Control of direct cost growth to 10% has helped gross profits grow 33% and lower tax growth and low net debt have enabled NPAT growth of 45% or 42% on constant currency.

Now, having recovered from the impacts of COVID on the sector, % gross margin and % operating margin are back on trend showing the operating leverage of the business.

Overall, cash generation was strong with FCF over $100m (including payment of $80.9 for acquisition).

The Student Placements business is the core growth driver and, within this, you can see the importance of the Indian market, shown below, with China yet to return to pre-pandemic strength.

My Key Takeaways

International education is back, and $IEL has performed well in FY23, with strong growth and margin expansion.

I had been watching this company for several years and couldn't justify the SP in the heady days of $28-$32/share. However, earlier this year, when the market had a little tantrum over opening of the Canadian market to competition in IELTS my patience was rewarded, and I took an initial 2.5% RL position.

My reading is that the result today is strong, and with the SP below my preliminary valuation of $24-$25 (likely to be increase with the FY result in the bank), I'll happily take another bite today if the market has another sad-on with this minor miss.

Disc: Held in RL (2.6%) but not on SM. (I consider $IEL a proven,profitable, quality company and I tend not to hold these on SM)

·      September 2022 Intake Education ~A$83m - is a leading student placement agency that has operations across Nigeria, Ghana, Kenya, Philippines, Thailand, Taiwan, India and the UK. https://www.asx.com.au/asxpdf/20220920/pdf/45f8wf987wtljm.pdf

·      July 2021 Britsh Council’s Indian IELTS operations £130 million IDP and the British Council currently both administer IELTS tests in India operating parallel pan-Indian distribution networks. The Transaction will bring BC IELTS India operations under IDP ownership, establishing a single network that provides the foundation for IELTS to build on its leadership position in India. https://www.asx.com.au/asxpdf/20210701/pdf/44xxdgcsfbcf17.pdf

·      May 2017 HCP Limited (20% Holding) $6.4m - a Chinese company specialising in delivering English language test preparation materials via social media and its mobile app. https://www.asx.com.au/asxpdf/20170607/pdf/43jsyhjp2q548n.pdf

·      Jan 2017 Hotcourses £30.1m with an additional £4.9m representing net cash in the business upon completion - owns and operates a portfolio of education search websites that help future students make the right study choices and connect with universities and colleges around the world. The company provides students with unique online tools to search for appropriate courses and plan their studies. https://www.asx.com.au/asxpdf/20170116/pdf/43fbr2bwjkq1r7.pdf

Capital Raise

·      April 2020 Raised $254m, $225m Institutional, $29 Retail at $10.65 per new share

CEO/MD Step Down

IDP Education announced after hours last night that CEO and MD Andrew Barkla will step down from his role in Sept 2022. He will be retained in an advisory role until Sept 2023 and transition into a Non-Executive Director should he be elected by shareholders.

Full Announcement here

Disc: Not held.