IEL: Continuing to deliver for students and investors

Idp Education (ASX:IEL) provides English language testing, tuition and university placement services for international students. It is the co-owner of IELTS (International English Language Testing System) which is the world’s most popular English language proficiency test for study, work and migration purposes. Over 11,500 organisations accept IELTS as evidence of English language proficiency. IDP Education delivers the IELTS test in over 80 countries. The IELTS exam is one of the gates hundreds of thousands of people must pass through in order to enter Australia.

Over 55% of IDP’s revenue is derived from English language testing, with a further 36% coming from student placement services. The remainder comes from English language courses and digital marketing and events.

The student placement service places students into courses across Australia and New Zealand, USA and Canada and the United Kingdom. Over 84,000 students were placed in 2023 equating to $351 million in revenue.

English language courses are primarily run in Cambodia and Vietnam. Revenue from this segment was $33 million with growth of 62% as student volumes rebounded in Cambodia. Prices also increased as students returned to classrooms and gross margins increased 3% to 48% as per student costs declined.

The Digital Marketing and Events segment generated revenue of $48 million. This comes from providing data analysis services to clients such as universities to help them source suitable student candidates.

IDP Education meets the definition of a compounding quality stock as articulated by Stockopedia contributor Roland Head in his article Building a screen to find Compounding Quality stocks. When this screen is applied across the ASX and NZX, there are currently 12 stocks that make the grade. I have previously written about a number of these including TechnologyOne (ASX:TNE), Netwealth (ASX:NWL), Car (ASX:CAR) and PWR Holdings (ASX:PWH).

IDP Education has been in existence for 50 years. They were listed in 2015, spun out of the Seek Investments business. The chairman has been with the business since prior to listing. They appointed a new CEO in February this year, Tennealle O’Shannessy who previously ran Adore Beauty (ASX:ABY) and before that was with Seek Learning. The previous CEO, Andrew Barkla has now joined the board as a non-executive director.

Revenue and earnings have demonstrated strong compound growth over the last 10 years. Revenue has grown at a CAGR of 16% as shown in the chart below. There was a dip during the pandemic as students were unable to travel for study purposes, but the previous trajectory has now resumed.

Source: IDP Education, FY23 Annual General Meeting, 17/10/23

Earnings have grown even more rapidly with adjusted EBIT recording a CAGR of 22%.

Source: IDP Education, FY23 Annual General Meeting, 17/10/23

The most recent year saw very strong growth with revenue increasing 24% and operating income growing 39%. This was largely driven by the Student Placement division and supported by the English Language Teaching. Student placement into Australia saw a strong rebound with revenue growth of 86%.

In addition to organic growth, IDP also engage in M&A. They acquired Intake Education to strengthen their student placement operations in Africa. In the last financial year they added 46 student placement offices which now number over 200 across 35 countries.

IELTS saw a record number of tests sat at 1.9325 million. This was up 1% on the prior year. The performance varied across regions. India saw a 9% decline due to visa processing delays and rejections for students trying to enter Canada. This saw a decline in sentiment towards Canada. Testing in India for all other destinations recorded growth. Likewise, outside of India, volumes were up 18% with strong performances from Vietnam, Pakistan and Nigeria.

This highlights a key risk for IDP. They are subject to the whims and political pressures of the destination countries on immigration and student visas. This can lead to shifts in demand. Currently their largest destination markets for student placements are Australia, United Kingdom and Canada and India is by far the largest source market at 53%. Another example, also from Canada, occurred earlier this year in May when the Canadian government announced that they would not rely solely on the IELTS test for migration purposes and also allow other competing tests to be used. This saw the share price plunge 16% on the day. One analyst forecast that this could lead to a 14% decline in NPAT. When the UK previously opened up language testing to other players it led to a 10% decline in market share for IDP.

IDP are a market leader in English testing and student placement. The macro environment is generally supportive of these areas. Many developed countries are keen to attract students from the developing world to assist with skill shortages and ageing populations and therefore have supportive policies in place for international study and migration. Developing nations also tend to have a higher proportion of young people and less developed education systems. Australia is currently the most preferred destination for international students. This is assisted by changes to student visas for many courses that allow students to stay in the country for an additional two years to work after they graduate.

This long term trend is demonstrated by the chart below. Note it does not cover the period of the pandemic.

Source: IDP Education,

Returning to the second component of a compounding quality business, quality, IDP scores highly with a Quality rank of 97. This is supported by a strong balance sheet with low net debt and plenty of cash. They have also issued a minimal amount of new shares over the last five years.

Free cash flow generation is strong which in turn allows for the payment of healthy dividends although the forecast yield is only 2% due to the high share price.

The table below shows all of the criteria for the quality compounding screen. As can be seen, IEL exceeds all thresholds, often by sizable margins.

As is the case with most of these quality compounding stocks, the market is well aware of their quality and they are priced accordingly. IEL trades on a forecast PE ratio of 34. Advocates of the compounding quality investment approach generally have the view that over the long-term it will be the growth in the underlying value of the business that is the biggest determinant of return rather than the price paid. The share price of IEL has increased over six fold since listing.

IDP Education is subject to the risk of political decisions and external disruptions, but they have proven themselves to be a resilient business. Even during the pandemic, whilst they saw a decline in revenue, it was not nearly as severe as may have been expected given the circumstances. They have clearly developed a winning formula. The key questions are will the future deliver similar growth to the past, and if so, how much should you be willing to pay to access this growth.

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