Buying stocks based on currency moves is risky. Currencies are tough to predict and their effect on corporate profits and share price is rarely clearcut.
Who knew the Australian dollar would briefly touch US80 cents this year? The talk was for flat or lower interest rates and weakening commodity prices. And a rising United States dollar as interest rates there lifted. Hardly the conditions for a higher Australian dollar.
Also, media stories about Australian dollar “winners and losers” are often simplistic. Australian multinationals usually have operations in multiple countries and exposure to several currencies, some of it hedged. Cost bases in different currencies complicate the picture.
A better strategy is focusing on high-quality companies in attractive industries – and buying them when they trade below their true value. Any boost from favourable currency trends should be the cream rather than the cake.
When buying Exchange Traded Funds (ETFs) or unit trusts that own international securities, consider using funds that hedge currency exposure. That way, you do not have to form a view on the underlying security and currency moves. Many investors, including this author, have experienced a rising Australian dollar crunching offshore fund returns over the years.
My view is not meant to downplay the squeeze a higher Australian dollar puts on trade-exposed industries. Or the benefit that importers, such as retailers, gain when our dollar is worth more. But some industries are more currency exposed than others.
Consider international education, Australia’s third-largest export sector and one of its industry stars, earning almost $20 billion last year. In theory, a higher Australian dollar makes international education here less competitive compared to our offshore university rivals.
Yet the relationship between currency and international student enrolments in Australia is not as linear as it seems. Some universities, for example, say our rising currency this year has so far had a minimal effect on international student demand for our courses.
A sharply higher dollar would eventually reduce demand as offshore students must convert more of their home currency into Australian dollars to cover courses fees and living expenses. But how many students factor in currencies when choosing univeristies and courses?
Choosing to move from Asia to study in Australia, for example, is a huge financial and personal investment that looks out several years. The main decision drivers are country, university and course – currency, important at the margin, is not a key driver.
Moreover, the media always reports the Australian dollar against the Greenback when considering sector winners and losers. Most growth in international enrolments here is from China, India and South-East Asian countries. Assessing the Australian dollar against the Yuan and Rupee is key for our international education sector.
Currency machinations aside, Australia’s international education has terrific long-term prospects. Yes, Asia is developing more universities and their quality is improving. But a western education is still keenly sought in emerging markets.
Technology is unlikely to disrupt international education in the way some proponents expect. Although massive Open Online Courses (MOCs) have attracted much attention, enrolment in face-to-face education in Australia keeps rising. The education “experience” is sometimes as much about living in Australia and learning English as it is about the uni course.
Also, intensifying financial pressures in higher education will surely lead to more universities pushing for greater international enrolments. As the Federal government cuts funding, many unis will need more students paying higher prices. International students are a target.
Long term, the middle-class boom in emerging markets will underpin offshore demand for Australian education. Another 2 billion Asians are expected to join the middle class by 2030 on OECD forecasts – a trend that will shape Australia’s international education sector.
Australia is superbly positioned to benefit. Our multiculturalism is a significant long-term competitive advantage. International students choose Australia because we are relatively safer than the United States and Europe and more accommodating of other cultures.
The Trump Presidency in the US and Britain’s exit from the European Union are already weighing on international demand for higher education in those countries. Australia could benefit as students in China, India and other emerging markets favour our unis.
1. IDP Education (IPL)
These are excellent trends for IDP Education, a provider of international placement services and English language testing, and operator of English language schools in South-East Asia. IDP sources students from more than 30 countries and places them in 600 universities in five countries, including Australia and the US.
IDP is a part-owner of the International English Language Testing System (IELTS), the world’s leading English language test for students and migrants. Millions of people take the test each year. The company’s English language division contributed about two thirds of FY16 revenue.
IDP has starred since its November 2015 float, soaring from a $2.65 issue price to $5.20. Operationally, the company has not missed a beat.
I wrote favourably about IDP for the Switzer Super Report in early January 2017, nominating it as “one of four oversold stocks” when it fell to $3.92 in line with the broader sell-off in small caps. In July, I included IDP as one of the top stocks for 2017-18 in this report’s New Financial Year special edition. So far, so good.
IDP is due for a share-price pause or pullback after stellar recent gains. But it is hard to see demand for English language-testing falling as more students and migrant workers arrive.
A consensus of six broking analysts has an average target price of $5 for IDP, suggesting it is trading slightly above fair value. IDP can do better than the market expects over the next three years and is among the higher-quality small-cap stocks.
More will be known when IDP reports its FY17 result later this month.
Source: ASX
2. Navitas (NVT)
As IDP rises, education services provider Navitas has fallen sharply. A disappointing FY17 result drove its shares 12 per cent lower this month.
Navitas, a former market darling, has a strong business model. The company provides university pathway programs for international students. As a former university lecturer for eight years, I recall many students who earlier completed a one-year bridging course.
Navitas owns SAE, a media technology institute that has 54 campuses in 28 countries, and has a professional and English language program division. The university pathway business is key, accounting for about 60 per cent of Navitas’ revenue.
Like IDP, Navitas is benefiting as more international students choose Australian universities either directly or via a one-year bridging course that prepares them with course material and English training. Underlying trends in Navitas’ university pathway business are solid: its university partnership enrolments rose 8 per cent in the second semester.
But Navitas has lost revenue from the closure of some Sydney colleges and from contract losses in the Adult Migrant English Program (AMEP) after a re-tendering process. Unfavourable currency movements hurt Navitas’ UK and US operations.
Although disappointing, Navitas’ FY17 result did not warrant such a sharp share-price fall. Operating cash flow was good, less capital was invested, the share buyback remains ongoing and demand for Navitas’ Australasian colleges is especially strong.
My main concern is contract-renewal risk. Several contracts are up for review in the medium term and a university sector under growing financial pressure is likely to push for greater cost savings in contract renewals and tendering processes. That could weigh on Navitas’ earnings.
The average share-price target for Navitas, based on a consensus of 10 broking firms, is $4.40. That view looks about right. The company probably has some upside in the next 12 months but gains may be limited as the market waits for news of contract renewals.
Longer term, Navitas is well run, has excellent cash flow and low capital expenditure recruitments. An enviable position in the international education market is another attraction. But the potential rewards in the next 12 months do not quite justify the risks, at the current price.
Source: ASX
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at August 10, 2017.
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.
