Five education and training must-have companies

Financial journalist
Print This Post A A A

With Australia’s economy in transition from resources to non-mining sectors of the economy, investors are on the lookout for the industries that could drive this move.

The outlook for learning

While housing springs to mind most readily, the education and training space is also well worth a look; particularly if you noticed the jobs data for February: while the economy added 50,100 jobs over the three months to February, the education and training sector accounted for 22,800 of them, or 8% of Australian jobs.

When combined with the latest data from the Australian Bureau of Statistics (ABS) on exports, the importance of education and training to the Australian economy really ought to get investors thinking.

In 2012/13, education was Australia’s fourth-largest export earner, bringing in $14.4 billion in income. While that is streets behind the big commodity exports of iron ore ($79.7 billion) and coal ($38.9 billion), it is only just behind the number three export item, gold, on $16.2 billion. Education is Australia’s largest services export, even ahead of tourism, which generated $11.7 billion in 2012/13.

That amount mostly comes from foreign students travelling to Australia for education and paying for their courses, but it also comes from overseas earnings of Australian education providers.

The right exposure

Investors really should be looking for some exposure to such a major export earner. Fortunately, the stock market provides a handful of well-qualified education stocks.

Starting with the largest first, we have global job ads website operator Seek (SEK), which also owns international student recruiter IDP and Swinburne Online, that offers online courses in business, communication, design, education and social science, developed by Melbourne’s Swinburne University of Technology.

Seek owns half-shares in both IDP and Swinburne Online. Its partner in Swinburne Online is the university, while the rest of IDP is owned by Education Australia, a consortium of Australia’s 38 public universities. IDP helps international students find placements in Australia, the US, Canada, Britain and New Zealand, and also runs the benchmark IELTS English language tests and offers English-language courses.

At the interim result, Seek Education generated $78 million in revenue, 20.5% of the company’s total, and contributed earnings of $20.3 million, or 14% of the total. Seek is investigating floating IDP, which could be worth about $450 million.

At present, education and training accounts for about 20% of Seek’s business. That can be looked at as about one-fifth of a $5.9 billion market capitalisation, with the bonus of also buying into the highly successful jobs websites business, which operates in 12 countries. Seek has been an outstanding investment: it earned total return (capital gain plus dividends) of 77% in the last 12 months, and has returned 47% a year for five years. But while it is a great business, it is trading on a hefty 33 times expected FY14 earnings, offers an uninspiring dividend yield of 1.6% and the consensus of analysts is that it is trading 10% above fair value. Seek looks expensive.

The next largest – at $2.8 billion market capitalisation – exposure to education and training is post-secondary education specialist Navitas (NVT), which offers English-language training, high school, university preparation, university programs, career advancement programs and migrant settlement services to students, professionals and migrants from all over the world in campuses in Australia, Canada and the United Kingdom.

Navitas has a well-integrated business model, spearheaded by the university programs division, which offers ‘pathway’ university preparation programs to international students who do not qualify for direct entry into NVT’s partner universities, either because of proficiency in English or their academic record.

The university program’s division generates about 57% of Navitas’ revenue, and almost 70% of profit. It has 33 offshore programs, run through 19 colleges and four managed campuses, in eight countries.

Navitas also operates vocational institutes, as well as providing English- language courses, and its student recruitment division operates in four countries, sending more than 5,000 students overseas each year to study.

Navitas has also been an outstanding performer: it has delivered total return of 48.5% in the last 12 months, and 34% a year over five years. Recently, the company’s earnings profile and strong margins – about 27% in the university programs division – has seen it talked of as a “defensive” stock, but it is not without competition.

Like Seek, Navitas trades on a lofty price/earnings (P/E) ratio, of 34.5 times expected FY14 earnings, and is also not a yield stock, at 2.6% expected yield. And also like Seek, the strong support from investors has pushed it into over-valued territory: the analysts who follow it see the stock as about 10.4% north of its consensus target price, of $6.78.

Smaller players offer more potential

A smaller – but more domestically focused exposure – is vocational education and training company Vocation (VET), which listed in December 2013. Vocation delivers education and training services through workforce-based training and development programs for corporate and government clients; individual student training, online or face-to-face; and outsourced managed services to vocational training providers.

For the half-year ended December 2013, the newly listed Vocation brought in revenue of $58.9 million, just under half of the full-year FY14 forecast of $118.3 million, and net profit of $7.5 million, or 38% of the full-year FY14 forecast of $19.6 million. The company maintained its FY14 guidance at its prospectus forecasts.

Vocation has had a strong start to life as a listed company, but at $2.65 – up 40% on the issue price – the stock still trades at a less-expensive multiple than Seek or Navitas, at 20.9 times expected FY14 earnings, and a 2.5% expected dividend yield. More importantly, its analysts’ consensus target price is $2.85 – giving it 7.5% upside potential, instead of the over-valued look worn by Seek and Navitas. At a market cap of $530 million, Vocation is a lot smaller than Navitas or Seek, but it looks more likely to outperform in the near future.

There is a handful of other smaller players in the sector. Academies Australasia (AKG) offers English-language, senior high school, Singapore Government school preparatory certificate, diploma, advanced diploma, bachelor and master degree courses through 10 Australian campuses. It says its students come from more than 118 countries. AKG is profitable, has been a sound market performer in recent years and is financially strong, and is expected to pay a dividend yield of 5.2% in FY14, but is very small – it has a market cap of just $51 million.

Education provider RedHill Education (RDH) runs four Sydney-based education businesses: Greenwich English College, which offers English-language courses at two Sydney campuses; Go Study Australia, which provides student recruitment services in Australia and overseas; the Academy of Information Technology; and the International School of Colour and Design. RedHill is now profitable after a disastrous first couple of years on the stock market, but is still 15% underwater on its 2010 issue price of $1 – and is capitalised at just $25 million.

Lastly, there is Kip McGrath Education Centres (KME), an Australian-based franchised global tutoring service aimed at primary and secondary school students, operating in Australia, New Zealand and the UK. Kip McGrath has emerged from several years of earnings and share price doldrums, but at a market cap of $14 million, it is quite small for self-managed super fund investors.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition

View More Articles