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Can stellar growth continue for IDP Education?

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Key statistics: ASX: IEL
Closing share price: $6.98
52-week high: $7.750
52-week low: $4.120
Most recent dividend: 8.5c
Annual dividend yield: 2.03%
Franking: 70%

 

About 16 months ago I wrote an article about IDP Education (ASX:IEL) where I noted that it was a high quality company that since listing in November 2015 had performed strongly both in terms of profits and share price.

Since that time the share price has risen a further 50% and the most recent half year results, released this month, showed half year profits up 27%. What is driving this stellar growth and importantly, is it set to continue?

IDP Education provides English language testing, tuition and university placement services for international students. It is the co-owner of IELTS (International English Language Testing System) which competes with TOEFL for the title of “world’s most popular English language proficiency test”.

More than 10,000 organisations accept IELTS as evidence of English language proficiency across 140 countries. More than 60% of IDP’s revenue is derived from English language testing, with a further 27% coming from student placement services.

The remainder comes from English language and other courses. Revenue grew by 28% in the first half of 2018 with growth in Asia a key driver.

Profits for the 2018 financial year are forecast to increase by 20%. If this is achieved it will represent a return on equity exceeding 45%. This is very high and reflects IDP’s very strong competitive position.

IDP’s competitive advantage lies in the strength of its brands, especially the IELTS brand. With IELTS and TOEFL so entrenched as the two most recognised English language proficiency tests it is very hard for other competitors to gain a foothold.

IDP’s earnings per share have increased 17%pa since listing and are forecast to keep growing at 19%pa over the next three years. A lot of this growth is coming out of Asia, including India and Vietnam, but it is broad based.

As incomes increase in some of these developing nations the desire to get an education at an English language institution is high.

IDP is in the fortunate position that it does not only place students into Australian institutions, but also many other nations. The most recent quarter saw strong growth in placements into Canada and the UK.

IDP is able to leverage this growth at multiple points in the ecosystem. It has a comprehensive marketing system, utilising technology as well as its 100 locations across the globe. It has also invested in technology to build out a platform designed to guide international students and connect them with opportunities to achieve their learning and career objectives. IDP organises the placements, provides the qualifying tests, in the form of IELTS, and also provides some English language tuition.

The balance sheet is another source of strength for IDP with a net debt to equity ratio of only 11%. Prior to the most recent half, cash exceeded debt but a sizeable investment in technology has resulted in additional debt.

From the perspective of a value investor IDP Education is not cheap. It is trading on a forecast PE ratio for 2018 of 33. The dividend yield is correspondingly low at about 2.3%.

The price jumped 20% following the release of the half year results earlier this month. At current levels the growth profile is factored into the price, but in its short, listed life it has had a pleasant habit of surprising on the upside.

 

Written by Chris Batchelor

Chris Batchelor

Chris Batchelor CFA is executive manager of SMSF Direct at
SuperConcepts.

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