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IDP Educated (ASX: IEL)

High Conviction Buy – Initiation Report

IDP Education (ASX: IEL) facilitates student placements and testing. The company has been one of the more hyped stocks on the ASX as it maintains a leadership position in its markets and has delivered very high growth. The stock hit a high of $40.26 in November 2021.

Recently the market turned pessimistic on the stock. While many fund managers are still talking up their underwater positions, the stock has sold off to recent prices below $16, with downward momentum looking strong.

The bad news has been creeping, yet the company has delivered strong results despite a grim regulatory environment. IDP Education is not for the faint of heart. It’s the second most shorted stock on the ASX, with 15.58% currently shorted.

Source: Shortman.com.au

While this might all sound rather grim, the stock is at a cheap valuation.

We added Evolution Mining (ASX: EVN) to our high conviction buy list when it was similarly out of favour. It continued trending lower for over a month before a strong turnaround delivered a solid gain in just a few months.

Sometimes, it pays to be brave and jump into a falling stock. IEL is a strong business that continues to deliver growth. We caution investors that we don’t know when sentiment towards the business will turn around. It could happen in a few days or languish for a year. But we see great long-term value in buying and holding at these prices.

The IDP Education Business

So, with that long caveat in mind, let’s look at IEL and what we like about the business.

IDP has three main business lines, which we’ll dive into.

Placements

IDP helps students in overseas countries (typically Asia) apply for educational courses in Australia, Canada, the USA, and the UK. They assist students with entry requirements, visas, and other documentation.

The best part is that they don’t charge students anything for entry to Australia. They get kickbacks from the universities themselves.

The company’s reporting splits student placements into three categories: Australia, The Rest of the World, which includes Canada, the UK, and the USA, and Other Services, which covers revenue from institutions for marketing, data, consultancy, and events.

From the 1H24 results, placements increased by 33% to 57,300. Revenue from Australian placements increased 43% to $92.3 million. Other destinations had the same percentage growth on a constant currency basis. However, the statutory growth was higher at 51%, up to $163.4 million.

Other services increased 20% (15% on a constant currency basis) to $31.9 million. The total placement segment, therefore, grew by 44% to $287.5 million compared to 1H23.

That’s impressive growth!

What’s more, even though IDP Education is the market leader, it’s a very fragmented market, and they still only have a tiny slice of what has been a quickly growing pie.

Source: IDP Education 1H24 Results Presentation

English Language Testing

IDP administers IELTS (International English Language Testing System) exams. IELTS is the most common English language test and is required for many academic, professional and visa opportunities worldwide.

In 1H24, the number of IELTS tests administered fell by 12% to 901,800. Revenue fell by just 5% to $270.3 million, with lower numbers partially offset by a higher average price.

The main driver of lower testing numbers was from India, with a 31% drop in volume due to lower repeat testing rates for entry to Canada and weaker market conditions. Outside of India, IELTS volumes were actually up 17%, with strong growth in target markets.

Source: IDP Education 1H24 Results Presentation

English Language Teaching

At the end of FY23, the English Language teaching division operated 10 schools in Vietnam and Cambodia. In 1H24, teaching volumes increased by 15% to 51,600 courses, and revenue increased by 25% to $19.6 million. The strong result was driven by price increases in Cambodia and the addition of Intake Education schools in Taiwan.

The Challenges

There’s recently been a shift in attitude, if not regulation, towards immigration in many of the key markets in which IDP places students.

Australia is the biggest market and has recently tightened visa rules to restrict non-genuine students’ ability to find a back door to work and move to Australia. This is tricky for IDPs, who openly market themselves as providing a path to permanent residency through student visas.

So, their marketing approach does not do themselves any favours with the government. With the housing shortage in Australia looking dire and continuing to create public pressure on the government, we’ve seen some anger directed towards the extremely high levels of migration.

There is a strong potential that the Liberal Party will adopt an anti-immigrant policy in the 2025 election. The Labor Party may take a less extreme but still restrictive policy towards immigration to mollify voters.

Similar themes are playing out in other developed countries. Canada has capped the number of international students until the end of 2025, and the UK is reviewing its graduate path working visas.

Source: IDP Education 1H24 Results Presentation

The US is the major developed country that is bucking the trend. The immigration focus there is squarely on illegal border crossings from Mexico, which has become a contentious issue over the last few years. This has been a key battleground between Republicans and Democrats and is likely to be a key platform issue in the election in late 2024. This means that student immigration is not a discussion topic and is unlikely to face near-term restrictions.

This is good news for IDP as the US market is massive, and they currently have a very limited market share. So it presents a big growth opportunity.

IDP claims that the tighter regulatory environment for visas is actually good for their business, not bad. And they may have a point. When it becomes harder to get a student visa, individuals are more likely to turn to professionals for help, as they are more likely to get a positive outcome.

This is reinforced by IDP’s market-beating metrics. The company’s visa approval rates are far above the industry average, giving it a very strong competitive advantage when visa approvals become more difficult.

Source: IDP Education 1H24 Results Presentation

There’s proof of this mechanism in action. In the half we just had results for, IDP saw strong increases in placement numbers despite the overall market shrinking slightly due to tighter visa restrictions in key markets.

So, while challenges exist in the current regulatory environment, they might not be as bad as the market perceives.

The Short Trade

Magellan Financial Group has been loading up on IEL since early January in its Airlie Funds division. They’ve quickly accumulated a 5.1% stake in the business while some other big players are dumping the stock. So clearly, there’s still some institutional interest.

We often see that as stocks gain short interest, a pile-on trade starts to occur. The more a position is shorted, the perception is that it becomes safer to short. That is because it creates a downward pressure feedback loop.

The stock that is shorted has to be borrowed. The underlying owner of the stock is presumably happy to hold their position and isn’t looking to sell. Otherwise, they wouldn’t lend out their shares to be shorted, so they wouldn’t have been sellers anyway. The sellers coming in to short the stock, who do not presently own it, therefore create an artificial imbalance whereby there are more units being sold than bought.

These imbalances are temporary while the short selling increases. Once the trade starts to unwind, the reverse happens, and we get an artificial imbalance of more people wanting to buy the stock than those selling. This is one of the biggest criticisms of allowing short selling in the market. It creates artificial forces that don’t otherwise exist.

When too many short sellers are caught when the stock starts to rise, it can lead to a short squeeze, which is a rapid increase in price as short sellers are margin-called and scramble to exit their positions while there is limited liquidity to exit the trade.

A few years ago, we saw a prime example of a short squeeze when Game Stop (NYSE: GME), listed in the US, had more than 100% of its available shares shorted. A Reddit forum conspired to push the price higher, resulting in several funds suffering severe losses and some even being forced to close.

While we don’t know when sentiment in IEL will shift, the unwind of the short trade could lead to a sharp move higher when it does change. Such a move could be very hard to get on.

Outlook

In addition to delivering strong revenue growth, IEL has managed to expand margins, compounding its growing profitability.

Source: IDP Education 1H24 Results Presentation

Revenue has grown from $255.1 million in FY14 to $981.9 million in FY23, a CAGR of 16.16%. Revenue was $579 million for the first half of FY24. Analysts expect FY24 revenues to come in at $1095 million.

The balance sheet is strong, with $142 million in cash and $143 million in net debt. FY23 NPAT was higher than their current net debt at $149 million.

Fourteen analysts cover IEL, with an average price target of $22.85, more than 40% above current prices.

Median EPS forecasts are for 63 cents in FY24, equating to a forward PE of 25.4. In F25, EPS is expected to climb to 69 cents, equating to a forward PE of 23.2. In FY26, it’s 82 cents or a forward PE of 20.

The recent pessimism in the stock has brought it back to valuations not seen since 2017.

Source: Finbox

Recommendation

IDP Education is a high-growth stock that used to be one of the most hyped stocks on the ASX. It has since fallen prey to hyperpessimism. A large short position has opened up on the prospect of regulatory changes in key markets.

The thing is, the company has continued to perform despite these risks. The current valuation is looking too good to pass up. We qualify this by noting that the share price can continue to fall, and we are happy to hold this for a return in 3-5 years. So, this one is a longer-term play.

Our recommendation is to ‘buy’ IDP Education (ASX: IDP) at current prices up to $22 and sell above $32.

Technical Update

There’s no getting around the current technical picture. IEL is in a heavy downtrend.

The next technical support is at $14.07. It’s substantial support, and we expect buyers to step in and at least delay the price slide. A consolidation at this level is likely, and we see a buy here as very good value.

Below that, we have a minor level at $11.44 and another major support at $9.89.

On the upside, $20.69 is the level to beat. A consolidation above this level tells us momentum has likely turned. But given the good value here, we don’t want to wait until then to get in.

We are also watching out for signs of selling near downward-sloping resistance, shown by the two falling orange dashed lines below. The resistance here is not well defined, so these two are just two strong potentials.

A break off a falling trend line can be a strong turnaround signal, particularly in a heavily shorted stock.

Source: TradingView / Shares in Value

 

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