Educational institution our Hot Stock of the week
This week's Hot Stock is courtesy of Chris Batchelor from Skaffold.
Closing share price 25-10-16: $4.600
52-week high: $4.99
52-week low: $3.100
Most recent dividend: 5.5c
Annual dividend yield: 1.19%
The IELTS exam is one of the gates hundreds of thousands of people must pass through in order to enter Australia. Next time you talk to anyone from a non-English speaking country who has recently applied for Australian residency or enrolled to study a course here, ask them about their IELTS exam.
IELTS (International English Language Testing System) is the world's most popular english language proficiency test. Over 9000 organisations accept IELTS as evidence of english language proficiency across 135 countries. IDP Education are co-owners of IELTS alongside British Council and Cambridge English Language Assessment. About 65%, or $237 million, of IDP's revenue in 2016 came from IELTS.
IDP also derives revenue from student placement services, placing students into courses across Australia and New Zealand, USA and Canada and the United Kingdom. Over 31,000 students were placed in 2016 equating to $104 million in revenue. A further $20 million was derived from english language courses taught across Cambodia, Thailand and Vietnam. Altogether, IDP Education's revenue grew 17% in 2016 to $362 million.
IDP is 50% owned by a group of Australian universities providing a strong link into the university sector. It listed in November 2015 and since listing has performed strongly both in terms of profits and share price.
The strong growth in revenue filtered down to profit growth of 32%. Revenue growth was driven by both volume and price growth. The fact that IDP could increase prices and still increase customer volumes, indicates it is in a very strong competitive position. This strong competitive advantage enables it to produce a return on equity of around 50%.
Normally such a high ROE would be eroded away by competitors trying to undercut them, but IDP's competitive advantage is in the strength of its brands, especially the IELTS brand. With IELTS so entrenched as a standard of English language proficiency it will be very hard for anyone to chip away at.
Cash generation is very strong and there is a substantial cash balance on the balance sheet and almost no debt. All of this has culminated in IDP attaining the highest Skaffold score ranking of A1.
Since the company listed a year ago, the share price has rallied over 70%. The strong rise has resulted in the share price getting a bit ahead of the estimated value but the valuation is forecast to continue growing strongly so any pull back in the price may represent an opportunity to get on board with a high quality company.
Data accurate as at 24 Oct 2016