Lost in translation

KEY COMPETITOR GAINS TEST APPROVAL

Need To Know

• Key English language testing competitor Pearson gains approval for “Student Direct Stream” (SDS) applications in Canada
• SDS is an expedited study permit for applicants from several countries, the largest impact being India and China
• Actual impact is difficult to quantify, however worst-case is potentially up to ~15% of EPS

News over the weekend that Pearson (PSON.LN) gained approval for its Pearson Test of English (PTE) for Student Direct Stream (SDS) applications has impacted the potential growth outlook for IDP and IELTS (estimated Canadian volumes being ~13% of total group gross profit). The SDS historically would only accept scores from IELTS or the Test d’évaluation de français (TEF). The introduction of PTE from 10 August 2023 has now brought in additional competition for this application. There are also 3 other tests that have gained approval, although these are far less common. The SDS is for students who have already received an acceptance letter from a Canadian institution and who are citizens in select African and Asian counties, although the largest relevant markets impacted are India and China. 

Historically, when opening the English testing to competitors in the UK, IELTS lost ~10% of its market share, whilst the Australian impact on market share was greater. We believe that market share losses will happen, however, note that IELTS is introducing its One Skill Retake (OSR) product in India, which allows students to pay ~60% of the fee and only have to resit one section of the test they failed rather than the entire exam. This has been adopted by the Australian government already and Canadian adoption would see improved outcomes for IELTS.

It is estimated that 70-80% of Indian student visa applications are done via the SDS, which would represent ~600k test volumes or around ~30% of IELTS FY24e volumes for IDP. For context, every ~10% SDS share loss would reduce FY24e EPS by ~3%. We note PTE is gaining momentum in India, with the market continuing to grow. 

Investment View

PSON had mentioned in its earnings calls that it was looking for further government approvals for its tests in Canada, where the announcement today should not have been a large surprise. The potential impact is likely largely a one-off rebasing in market share and earnings outlook, rather than a structural decline. IELTS continues to innovate and be the gold standard. Consensus is still forecasting ~20%+ annual EPS growth over the next 3 years and we retain our Buy recommendation although expect anywhere between 5-15% consensus EPS downgrades depending on market share assumptions, where a 50% loss would be a worst-case scenario and ~15% impact. We would expect somewhere closer to 20% or ~6% impact.