IDP Education (IDP) is a global organisation that helps international students find and apply to study at universities and schools around the world. It also distributes the International English Language Testing System (IELTS). IDP has two main operating divisions: student placement, where it acts as a recruiting agent on behalf of universities, and the IELTS. It also generates revenues from English teaching classes and from marketing events.
Migration returning. The strong recent boost in global migration post pandemic related lockdowns should act as a tailwind for IDP, both through its student placement program and from IELTS. In most primary English-speaking countries, (UK, USA, Australia and Canada in particular) a confirmed English speaking test is often required for both student and working visas, with IELTS being one of three tests formally recognised for eligibility.
The rising emerging countries’ middle class is driving a structural trend for overseas study in Western, English-speaking countries, where the standards of living and incomes are often higher. We view this trend as continuing, particularly in India as the economy and population grows.
IELTS operates in an oligopoly with two other major rational competitors in a relatively mature market. We expect earnings to continue to grow in-line with inflation, underpinning future cash flows for IDP. Product innovation, such as the recent introduction of the One Skill Retake (OSR) should allow it to continue to take market share. We note however that Duolingo (DUOL) has recently introduced an English test product, which may disrupt the market, and remain wary of any potential impacts.
Investment View
IDP has materially outperformed the ASX200 benchmark over the last 5 years, driven by strong growth across its business, underpinned by a structural trend of global student migration to English speaking countries. As borders have reopened, there has been a surge of migration numbers, providing meaningful tailwinds for IDP’s businesses, which we expect to continue in the medium-term.
EBITDA has grown ~23%pa from FY15-FY19 (pre Covid-19) and consensus expects it to grow ~28%pa from FY22-FY25e. IDP is expensive, trading on a 12m forward ~38x PER and ~22x EV/EBITDA, although note that the significant expected growth rate in earnings does command a higher multiple. The recent multiple de-rating provides an opportunity to gain valuable exposure to a structural growth trend and we initiate with a Buy recommendation.
Business Overview
IDP Education (IDP) is a global education services organisation that provides student placement, English language testing, and education consulting services to students and institutions worldwide. It was established in 1969 as the International Development Program (IDP) to help Australian universities attract international students. In the years that followed, IDP expanded its operations to Asia, Europe, and North America. In 1998, it partnered with the British Council and the University of Cambridge ESOL Examinations to establish the International English Language Testing System (IELTS). In 2009, it expanded its services to offer student placement and education consulting. In 2015, IDP Education became a publicly listed company on the Australian Securities Exchange (ASX). Today, with over 157 offices in more than 33 countries, IDP placed 55,400 students globally to achieve their education goals in 2022 and continues to be a leader in the global education industry.
The International English Language Testing System (IELTS) is a widely recognized English language proficiency test used for admission into educational institutions, immigration, and employment purposes in many countries. Today, over 10,000 organisations worldwide recognise IELTS making it one of the most widely recognised English language tests in the world.
Figure 1: FY22 Revenue by segment
Figure 2: FY22 Gross Profit by segment
Figure 3: FY22 Gross Margin %
Figure 4: Revenue and EBITDA growth
Cornerstone Questions
Can international student placement growth continue?
The student placement (SP) business essentially acts as a recruitment agent for universities. IDP has offices in countries all around the globe, with its primary source market being India, followed by China. ~87% of international students in Australia used an agent in 2021 according to the Student Experience Survey, and this number has risen over recent years. Other key destination countries agency usage is not as high but is continuing to grow. IDP generates revenue through a successful placement of a student into a destination university and collects on average ~12-15% of the 1st year tuition fee as payment. The price growth driver is thus largely a result of university admission fee changes, and to a lesser extent geographic mix of placements (with nuances in individual university contracts) with the average ~12-15% fee unlikely to change materially in the near-term.
Figure 5: US tuition fees have increased by ~6%pa on average over the last 4 decades (outpacing inflation) with similar growth across other major western universities
The main growth driver that IDP has some level of control over is volume growth. We focus on two main drivers, being the structural rise of the middle class in emerging countries (namely India) with overseas study being a key trend and continued market share gains through scale and innovation.
India’s middle class has risen from ~14% of the population in 2004-05 to ~31% according to research by People’s Research on India’s Consumer Economy (PRICE). The report also projects the middle-class population to reach 63% by 2047. Increasing wealth in India, one of IDP’s largest source country (53% of course enrolments in FY22) should drive increased adoption of international study as more families can fund the courses. In 2022, According to the Education Ministry data, more than 770,000 Indian students went abroad to study, a 6 year high. The increasing attraction of higher standards of living in key destination countries should also drive continued growth for IDP.
Figure 6: Student placement volumes growth driven by international university expansion, growth back to pre-Covid trend
The SP market in key source countries is highly fragmented given relatively limited barriers to entry. Whilst this leads to heightened competition, IDP’s scale, technology investment, reputation and track record provides it with a strong pipeline of student applicants. It is incredibly difficult to ascertain an exact market share, however IDP estimate it to be ~7-8%. This provides a long runway for growth as IDP can leverage its scale advantage to take more share organically. M&A is a potential strategy to hasten the process, however IDP have commented on its preference to grow organically, noting that any M&A activity would likely focus on technology advancements. This being said, IDP continues to innovate its products, including through offering fast tracked same day applications and offers through its ‘FastLane’ product, providing a key advantage, as well as margin benefit.
Figure 7: FY22 destination enrolments
Figure 8: FY22 source countries
Will IELTS maintain its competitive advantage?
IELTS has grown volumes across the globe, with it being one of the most widely accepted English tests by Governments and Universities. IDP has been able to grow its gross margin over time given its competitive advantage and scale. With it increasingly taking share of the SP market, it is able to effectively cross sell and recommend IELTS to its students, creating beneficial network effects. In addition, IDP also offers teaching and other support services, cementing itself as a ‘one stop shop’ for international students. The recent acquisition of the license to be the sole distributor in India will also serve to improve growth in volumes.
Figure 9: IELTS Gross margin continues to improve
Figure 10: IELTS test volumes growth, average fees impacted by FX
The English language testing market is largely mature, with only two other key competitors in source countries, being the Pearson test of English (PTE) run by Pearson PLC (PSON.LN not covered) and the Test of English as a Foreign Language (TOEFL) delivered by Educational Testing Services (private not for profit company). The market is largely rational with the products being essentially identical, with only some minor differences in where the tests results are officially accepted and recognised. Recently, Duolingo (DUOL not covered) has sought to disrupt the market, with a purely online English test at a much lower price point given its lower cost to administer.
In its 2Q22 results call in August 2022, DUOL management commentated that ~80% of universities in the US accepted the Duolingo English test, with this number likely now higher. We also note that DUOL is targeting universities in other key English jurisdictions such as the UK, Canada and Australia. We expect continued penetration from DUOL into the university markets, however note that it is unlikely that federal governments will accept the pure online test in the short-term future given considerable concerns around the possibility of cheating on the tests. We however note this as a significant risk to IELTS (and the other major English tests being the Test of English as a Foreign Language TOEFL and the Pearson Test of English) given the far lower pricing point may cause pricing power erosion of the current testing systems if the Duolingo English test were to gain government approval for visa applications.
Figure 11: English test prices in India are quite similar for the 3 majors, with Duolingo being significantly cheaper, causing some potential competitive concern
IELTS will need to continue to innovate its product in order to remain competitive. IDP has already taken the initiative to introduce a new component being the One Skill Retake (OSR) where a candidate can apply to retake just one component of the test that they failed, rather than needing to redo the entire test. This is already recognised by the Australian government for immigration purposes, and is a key competitive advantage compared to peers. Further, IELTS has the ability to improve its margins by rolling out more computer-based testing, allowing it to run more tests in the day and utilise fewer human resources, largely creating a fixed cost base, where scale should see continued improvement in operating leverage. We note recently that comments from key competitor PSON claim that it is gaining market share in India and are forecasting growth of ‘high single digits’ over the next 3 years, again highlighting the need to innovate and differentiate.
Valuations Considerations
Given IDP has shown strong historic growth, the stock has rated to an above market trading ratio. The Covid-19 related pandemic period heavily distorts the historic multiple given wide-spread lockdowns and low student mobility, largely impacting IDPs earnings. The balance sheet is in a strong position with only $84m in net debt (compared to FY22 EBITDA of $197m). Share prices typically over a long period of time tend to track earnings per share. Recently, IDP’s share price has diverged from its EPS growth, where the market either anticipates downgrades, or there is a potential opportunity.
Figure 12: 12m Forward PER trading in-line with historical average
Figure 13: Share price diverging from forward EPS trajectory
Figure 14: Revenue growth (FY22-FY25e) and FY24e EV/EBITDA for key peers
Figure 15: EBITDA growth rate relatively strong correlation to EV/EBITDA
Figure 16: IDP is unique compared to peers, with it having two differentiated businesses. Growing and sustainable margins with a higher growth rate justify a premium multiple
IDP has significantly improved its EBITDA margin since listing, from 16.9% in FY16 to 25.4% in FY22. There is significant scope for this to improve with increased operating leverage and network effects. Consensus is forecasting margins to rise to 31.4% in FY25e, predominantly driven by efficiencies in the SP business through IDP’s counsellors placing more students, assisted by technology improvements, and from increased digital applications where there is less interaction and guidance needed. EBITDA is forecast to grow by ~28%pa from FY22-FY25e, driven by the continued immigration tailwind and strong operating leverage. Historically, IDP has traded at a 12m forward EV/EBITDA in-line with the projected growth rate. Currently on just 22x, there is potential for a multiple re-rate higher. Being a growth natured company, IDP’s multiple would also likely benefit from a peaking in interest rates.
Investment Thesis
IDP is a global leader in the tertiary Student Placement market, with a significant opportunity to grow market share. Whilst IELTS is a more mature product, it continues to innovate and be the dominant English test in key source markets, underpinning future earnings. IDP is utilising both of its business to create intertwined network effects, by cross-selling its IELTS test to the students it places, as well as offering English language teaching and assistance services, cementing its position as a one-stop-shop for Students in their overseas education journey.
Migration numbers continue to rise globally as the world reopens after pandemic related lockdowns, creating lasting tailwinds for IDP. We expect migration to continue to be strong over the next few years, driven by structural trends of studying abroad, particularly at established English speaking universities. IDP continues to invest and innovate its product offerings, providing continued competitive advantages in its key markets.
Whilst valuation appears stretched, strong forecast growth rates driven by increased operating leverage and market share gains provide justification for above market multiples. We note the looming potential risk of the English language testing disruption from Duolingo, however believe this will not have a material impact in the short-term as Duolingo struggles to gain traction with government agencies.
We initiate on IDP with a Buy recommendation.
Risks to Investment View
