By Bob Kohut 08.04.2019
In 2015 Education as a major Australian Export moved from fourth place on the ABS (Australian Bureau of Statistics) list of our top export commodities to third place, bumping Natural Gas to fourth.
Unlike iron ore, education, like tourism, is not physically exported out of the country but is “purchased” by foreigners who come here and contribute to our economy with every dime they spend during their stay in Australia.
Education remains in third place, with international student enrollments here in Australia continuing an upward trend that began in 2014.
English has become the de facto international language, arguably from the preeminent position of American business and technology around the world. Students everywhere with dreams of successful business careers know they need to be able to speak, read, and write English, regardless of the country where they eventually settle in their careers. The global economy runs on the English language.
The US has the perceived reputation of having the best schools in the world, resulting in the majority of international students looking to the US for their education.
The picture has altered over the last four years as although the US still attracts the most students, enrollments in the US are declining. The following graph comes from the Migration Policy Institute based on research from educational research and information organisation Open Doors.
The declines in the graph do not appear to consider the students who come to the US to study English in order to gain entry into a US college or university. Here in Australia we call that educational category English Language Intensive Courses for Overseas Students (ELICOS).
A graph from Opendoors suggests an even larger decline in this category of students.
The reasons for the decline have been hotly debated with some arguing the declines correlate in time with the rise of anti-immigrant attitudes in the US and the changes in US policy following the 2016 election. The following chart lists some of the reasons for the decline.
The survey included member institutions of the Institute and spans the gamut of rationales for the decline, including items sometimes ignored in press coverage of changes in sponsoring country’s scholarship programs for US study, including Brazil and Saudi Arabia.
Anecdotal evidence from US educators indicates the trend is likely to remain in place in 2019. Tougher standards for educational visas in the US are accelerating the trend of the last few years (a 17% drop in calendar year 2017) of reducing the number of F1 Student Visas granted. Add to the toxic mix the decline in granting the US H1B visas needed for foreign students to remain in the country seeking employment in the US. The F1 Student Visa decline correlates with the timeline of declining enrollment starting in 2015. From market intelligence firm ICEF Monitor, the following chart shows the drop, with country information included.
Given the boiling cauldron of the current political climate in the US, it is not surprising there is debate over the influence of the change in immigration policies under the Trump Administration. A recent article in the Sydney Morning Herald entitled US plays ‘catch up’ after collapse in international student numbers interviewed a US State Department official who claimed the cost of a US education was more of a contributing factor than the Trump administration immigration policies.
In truth, to an Aussie investor the reasons for the decline are irrelevant. The trend away from US schools to other countries, most notably Canada and Australia, is real and likely to continue.
Our government is looking to expand the number of international students contributing to our economy. Many of these students come to English speaking countries with the dream of securing a job in the country of their choice for a few years of experience before returning to their home countries. The stance in the US is to make that dream harder, with changes in the required H1B work Visa. Here in Australia the government has extended the post graduate work visa from two years to three with the “Additional Temporary Graduate” visa.
There are currently three stocks on the ASX that operate in the International Student Sector now that Navitas Limited is about to be acquired by an Australian private equity firm.
Note that all three stocks have seen superior average annual rates of total shareholder return and substantial share price appreciation since the uptick in Australian international student enrollment began in 2015.
Academies Australasia Group (AKG) is the smallest of the three and the most revenue dependent on the 18 colleges across Australia and one in Singapore it operates, providing a range of educational programs from vocational and technical to Senior High School to certificates and undergraduate and graduate degrees to English Language Training.
The company derives 78% of its revenues from its International operations, with education as its only reported business segment in its financial reporting. Academies does offer “pathway” programs to assist international students find suitable programs in partnering schools.
The financial performance is solid, if less than spectacular. Academies has grown revenue in each of the last three fiscal years, with an FY 2016 loss of $4.2 million rebounding to a $3 million-dollar profit followed by a $4.3 million-dollar profit in FY 2018, a 43% increase.
Half Year 2019 Financial Results were solid as well, with a 9% rise in revenue and a 14% profit increase. The company pays a dividend with a current yield of 3.9%.
A review of the company’s financial reports suggests its business model of operating colleges could limit growth, given the operating costs of running a school versus the recruitment model of placing students in institutions not operated by the company. The company has a low P/E of 10.46, well below the sector average of 16.31.
Redhill Education (RDH) has what could be considered a hybrid business model, operating its own colleges and recruiting international students through its Go Study Australia placement offices in Italy, Spain, France, South America, and Australia. Redhill claims it now places more than 6,500 students annually in more than 150 tertiary educational institutions in Australia.
The company also operates independent colleges offering English language training at Greenwich College with the Academy of Information Technology offering vocational and high-level creative technology courses. In 2015 Redhill opened Greenwich Management College, offering certificate and diploma level vocational training. Student populations are mixed domestically and internationally with the new Greenwich Management College catering primarily to international students.
The company has campuses in Sydney, Melbourne, and Brisbane. The company has grown both revenue and profit in each of the last three fiscal years, with FY 2018 revenues rising 32% while profit rose a stellar 102%. Half Year 2019 Results were disappointing with a 10.8% revenue increase and a 19.5% drop in profit. The company pays a dividend with a current yield of 1.6%
IDP Education (IEL) was 50% owned by Seek Limited (SEK) and spun off with an IPO in November of 2015. The share price has shined since.
Despite stellar financial performance in FY 2018 the company’s share price stuttered perhaps due to a perception of excessive valuation. What makes IDP stand apart is its business model which is primarily recruiting through its student placement agencies, with more than 80 placement centres around the world guiding international students every step of the way for entry into one of hundreds of partnering colleges and universities in Australia, Canada, New Zealand, the UK, and the US. The company does operate English language training schools in Vietnam, Laos and Cambodia.
IDP literally provides everything an international student needs to get accepted into an English language school, paid for by the school of the student’s final choice. Services include academic counseling, application processing, and proficiency testing.
To gain entry into an English language school international students must demonstrate proficiency in English. Currently there are two recognised proficiency tests – TOEFL (Test of English as a Foreign Language), owned by US-based Educational Testing Service, and IELTS (International English Language Testing System), co-owned by IDP Education and the British Council and Cambridge English Language Assessment.
In the not too distant past schools in the US did not accept IELTS but now more than 3,400 US higher learning institutions accept TOEFL, including most of that country’s prestigious “Ivy League” universities.
IELTS alone is a solid reason for investing in IDP. Every time a student sits down anywhere in the world to take that proficiency test, the cash register rings at IDP. The company’s Half Year 2019 Financial Results list IELTS as IDP’s top revenue generator, up 19% while total revenue rose 23% and profit jumped 31%
These results continued the trend set in the FY 2018 Financial Results with revenues up 25% and profit up 21%.
The company is developing a digital platform for international student use, with online offerings of IELTS already in place. This platform will mirror the services offered at IDP placement agency offices, enabling students from more remote locations to make use of the company’s full range of services.