Navitas received a couple of broker reviews yesterday that again illustrates just how ignored dollar-exposed industrials have been:
Northern Hemisphere enrolments a touch weaker — 2nd Semester 2013 Northern Hemisphere enrolments of 3,610 EFTSU were marginally softer than we expected (Citi 3,652).
Canada and UK were in line; however the USA was where we were a little high.We trim our earnings — Our FY14 and beyond earnings are down slightly (< -1%) on the marginally lower-than-expected enrolments, and we have also adjusted our growth expectation for US enrolments for the upcoming September new year.
However our confidence grows – Despite trimming our earnings, with visibility to FY14 growth from the Australian business improving over the past few months, we see significantly less risk to our forecasts. Continuing improvements in Dept. of Immigration Visa application data and positive feedback from industry participants suggest that FY14 is going to be a strong year not just for Navitas, but for the International Student Education market in general. Our model already reflects this with 19% EBITDA growth for Uni Programs in FY14; however, we see the risk to this forecast diminishing.
Valuation up — Given our lower perceived earnings risk, we have lowered our assumed cost of equity in our DCF which has resulted in our WACC falling to 11.1% from 11.4%. We have also rolled forward our valuation for the new financial year. Our DCF and target price increases from A$4.85 to A$5.65 as a result.
We upgrade our recommendation — With underlying enrolment momentum improving, particularly in Australia, and Navitas being a key beneficiary of a weaker A$ given it benefits both from a translation point of view and also as Australia becomes increasingly competitive again in the global higher education market, we remove our prior Sell rating. We have always liked the Navitas model – we just found it expensive given the hockey-stick recovery in earnings we and the consensus had been forecasting. Given we now see less risk to these earnings estimates, we upgrade to Neutral.
Genius. Upgrade from sell just as the price has almost doubled in the past year! Mac Bank was more circumspect:
Navitas announced student enrolments of 3,610 EFTSU for the second semester of 2013 for its Northern Hemisphere University Programs colleges (includes UK, US and Canada) up 15% on pcp. Growth rates slowed from the +19% reported in the previous semester, albeit semester 2 is the smallest intake for the year.
The UK was the weakest of the regions at +2% growth (vs +12% growth in semester 1) with lower than expected re-enrolments. This has been put down
to students completing courses in much shorter time frames than previous years. Semester 3, the largest enrolment period of the year, will be a test to any trends developing in this regard.
The five US colleges reported +64% growth vs pcp, with the total cohort now sitting at around 450-500 students. The company expects to reach breakeven levels across all colleges with the September intake, which will require 800 students.
Southern Hemisphere enrolments are expected to be reported with the FY13 results later this month. Australian enrolments fell short of turning positive in the key March period, down <1% vs pcp, however this was an improvement on the -8% and -12% reported in the previous two semesters and is a clear sign that domestic enrolments are stabilising. “New student enrolments” (which typically make up ¼ of total enrolments) continue to show positive growth, up 10% in the first semester, and may be interpreted as an improving trajectory for overall enrolment growth for the second semester.
We forecast 3% NPAT growth in FY13, rebounding to ~20% growth in FY14, driven predominantly by UP enrolments and pricing growth as well as slightly
improved results in the Workforce Services, SAE and Student Recruitment businesses.
Earnings and target price revision lifted FY14 EPS by 2.6% based on UP assumptions. Increased PT to $4.11 ($3.99 prev).
The stock trades at a very high 80% premium to the emerging leaders industrials at 23.8x FY14E PER and 25% premium to NVT’s average historic PER. We continue to believe any FY14/FY15 recovery is more than priced in. Maintain Underperform.
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I can’t tell you whether this company is any good. But I can tell you that a 70 cent dollar is not priced into anything.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
