IDP Education Limited

IEL Details
 
Partial Sale of Shareholding: IDP Education Limited (ASX: IEL) is an education services provider that is involved in the placement of international students into education institutions in Australia, UK, USA, Canada, New Zealand, and Ireland. Recently, Education Australia Limited, a major shareholder of IEL, announced that it has sold 5.1% of the issued capital of IDP Education Limited for a total consideration of $219 million, equating to $15.55 per IEL share. This was done to allow Education Australia shareholders to monetise some of their investment in Education Australia. Education Australia has assured that it will continue to support the future growth of IEL and will continue to have three representatives on the IEL board. Education Australia Limited currently holds 40.23% of the company’s shares. Recently, The Chancellor Masters and Scholars of the University of Cambridge also reduced their shareholdings in the company to 40.23%, from the earlier 45.28%.

Completion of Placement and SPP:Following the completion of $225 million placement to institutional investors, IEL has recently completed a Share Purchase Plan (SPP), under which it has received ~$34.5 million from 1,292 registered shareholders. The company’s Directors have exercised their discretion under the terms of the SPP and intend to accept around $29 million of applications, above the originally targeted cap of $15 million. The proceeds of the placement will be used to enhance balance sheet strength and financial flexibility, and to support the business during the current macro-economic uncertainty by materially increasing liquidity.

Covid-19 Update: COVID-19 is having a material impact on IEL’s business as it has caused reduced scale or suspensions in IELTS testing as test centres are subject to “lockdown” measures. Further, the postponements or suspensions of university classes and travel bans are restricting students' ability to arrive onshore which is impacting the placements.Although many of the company’s IELTS testing locations are suspended, operations in some of the countries are slowly recommencing.

H1FY20 Results Highlights:Before the outbreak of Covid-19, the company was witnessing accelerating growth in its business with the benefits of the digital platform starting to deliver in terms of lead generation and conversion for student placement. In the first half of FY20, the company reported revenue of $379 million, up 25% on the previous corresponding period. Further, the company reported EBIT of $86.9 million and NPATA of $59.5 million, up 49% and 42%, respectively on pcp. The company is expected to release its preliminary earnings release for FY20 on 20 August 2020.


H1FY20 Results (Source: Company Reports)

Key Risks:The company’s results are currently dependent on the extent and the duration of Covid-19 Pandemic. IEL's business model relies on third party agents, licensees and other parties to conduct businesses on behalf of IEL and there are risks associated with these arrangements. Further, the company is also exposed to currency fluctuation risk as it will impact the cost of higher education courses for students and the cost of living and studying overseas. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:Over the last three months, the stock of IEL has increased by 20.06%. For H1FY20, the company’s gross margin and net margin stood at 66.9% and 15.2%, respectively. The company has a current ratio of 1.34x, in line with the industry median. We have valued the stock using Price to Earnings multiple based illustrative relative valuation method and have arrived at a price correction of lower double-digit (in % terms). For the purpose, we have taken peers like G8 Education Ltd, Janison Education Group Ltd (ASX: JAN) and ReadCloud Ltd (ASX: RCL). Considering the aforesaid facts and the uncertainty surrounding the impact of Covid-19, we have a watch stance on the stock at the current market price of $16.360, down by 1.327% on 6 July 2020. 

 
IEL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

G8 Education Limited

GEM Details
 
Ensuring Business Continuity amid Covid-19 Pandemic: G8 Education Limited (ASX: GEM) is one of Australia’s largest providers of quality early childhood education and care. Recently, on 17 June 2020, the company held its Annual General Meeting (AGM), wherein, the shareholders voted for six resolutions and all six resolutions were passed. At the AGM, the company highlighted that it has been making good progress in developing its new people management platform, covering all aspects of people management such as recruitment, onboarding, rostering, performance management, etc.  Further, in response to Covid-19, the company has implemented a cross-functional COVID response team and plans to ensure the health and safety of its workforce and operations. To ensure business continuity, the company has completed a $301 million capital raising which provided the liquidity and financial flexibility to withstand a prolonged period of economic downturn. 

Recognizing Non-cash impairment for H1FY20:For the half year ended 30 June 2020, the company expects to recognise an after-tax impairment charge in the range of $230m to $250m. It is worth noting that any impairment will have no impact on the company’s debt facilities or compliance with its banking covenants. The half-year results are expected to release on 24 August 2020.

FY19 Results Highlights:For the full year ended 31 December 2019, the company reported revenue of $920.1 million, up 7.2% on the prior corresponding period. Further, the company reported underlying EBIT of $132.5 million and Underlying NPAT of $76.4 million. During the year, the company divested 25 centres in Western Australia, resulting in a meaningful improvement in the quality and occupancy of the Group’s portfolio.


FY19 Results (Source: Company Reports)

Government Funding Packages:On 2^nd April 2020, the Federal Government announced an initial sector-specific relief package, providing all sector participants with certainty of revenue to enable centres to remain open during the peak of the pandemic. This initial relief package was later reviewed and updated with a transition phase package of support. The revised government support package is providing greater flexibility to increase bookings and attendances by removing the cap on revenues imposed by the prior relief arrangements.

Change in Directors’ Interest:Recently one of the Company’s Directors, Peter Trimble, acquired 20,000 fully paid ordinary shares in the company for a total consideration of $18,100 via on-market trade.

Key Risks:The company is exposed to the risks associated with the safety, health and well-being of its workforce. Further, the company is also exposed to the risk related to stiff completion, changes to regulatory environment, cyber and business interruption.
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of GEM has corrected by 51.58% in the past six months and is trading close to its 52-weeklow of $0.437, offering an opportunity for accumulation. For FY19, the company’s gross margin stood at 92.6%, higher than the industry median of 67%. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s decent FY19 results, recently completed capital raising, Government funding packages, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.860, down by 1.149% on 6 July 2020. 

 
GEM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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