Graduating with honours

RESULTS

Need To Know

• FY23 result in-line with expectations, stronger Student Placements offsetting softer IELTS
• Migration trends continue to support the entire market growth and underlying business volumes into FY24, with competition concerns largely overblown
• Sentiment likely to improve significantly on the result, with IEL well placed to deliver +20% EPS growth over the next 3-5 years

FY23 results overview vs consensus:

Revenue $982m +24% vs $984m

EBIT $228m +40% vs $227m

NPAT $154m +45% vs $153m

Final DPS 20cps vs 18cps

Investment Implications

The pre-exam nerves will be largely set at ease following the in-line FY23 result and solid operating performance. Whilst IELTS (International English Language Testing System) volumes were softer than expectations, the Student Placement (SP) business is scoring top marks. Revenue growth of 24% over the year was strong, especially after following a 50% rise in FY22. Operating leverage in the business was evident with EBIT (ex M&A costs) rising +40%. Margins are expected to improve slightly into FY24, with efficiencies in the SP business partly offset by higher spending in IELTS.

The disappointing IELTS volumes were entirely attributable to a fall in Indian students migrating to Canada, due to slower visa processing times and higher rejection rates. IEL noted that this had begun to unwind, but is still seeing some pressures. Indian volumes for other destinations than Canada all saw growth. Outside of India, IELTS volumes were up 18%, in particular, Vietnam, Pakistan and Nigeria all saw volumes of 40%+ and are maintained as key growth markets.

Importantly, management called out that the fall in Indian volumes was not due to competition, although noted it was too early to make a judgement on potential market share losses from the Pearson approval, which only began on 10 August 2023. IEL hammered home that IELTS has been through several regulatory changes to competition and has still been able to grow volumes by 13% pa over the last 16 years.

IELTS has also recently received approval in the UK for its One Skill Retake (OSR), where a student can retake just one part of the exam, rather than the whole thing. This was rolled out in India in May and is likely to see a strong rampup throughout FY24 and remains a strong competitive advantage. No timeline was provided for Canadian approval, but it remains a key priority for management.

SP continued its strength, with volumes in Australia up 77% on FY22, and other destinations up 39%. Higher average fees helped revenue grow 63%. IEL expect continued record high migration levels to underpin growth into FY24, and the FastLane platform (connecting universities to students) has grown significantly above expectations and remains a key competitive advantage for the business. The student pipeline remains strong, and conversion rates are set to improve with better application matching abilities through the use of AI.

Gross profit margins also improved across the group, evidencing strong operating leverage within the business. The balance sheet remains in a strong position, with just $42m net debt.

Investment View

Strong net migration remains a key structural growth trend for IEL to continue benefitting from, demonstrated by a healthy pipeline of conversion opportunities. IEL continues to win share in the Student Placement businesses, leveraging its global network and driving efficiencies for its agents.

IELTS remains the gold standard in English testing, and the introduction of One Skill Retake should provide a strong competitive advantage. The overall market continues to grow given the structural migration trends. 

Whilst the PER multiple of ~35x looks elevated, we expect IEL to deliver ~20%+ EPS growth over the next 3-5 years driven by strong structural growth trends and improving operating leverage. We retain the buy rating.