China’s snap decision to ban students who study at foreign universities online is both pleasing and a little terrifying for the international-education sector.
It’s pleasing because 40,000 or so Chinese students returning to Australia in the next few weeks will boost the education sector, local businesses and city centres.
International students add vibrancy to CBDs and many do part-time jobs. As Australia grapples with skill shortages, their return is welcome.
I look forward to international students returning to Australian universities and helping invigorate campus life. Some university campuses have resembled ghost towns during the past few years as more students studied online.
China’s decision is also terrifying because tens of thousands of Chinese students will return to Australia en masse, creating logistics nightmares. Demand for flights, hotels, rental accommodation and other student services will leap.
Yes, it’s a good problem to have. International education is a vital export industry for Australia and China’s decision suggests a further thawing of its relationship with us.
Which brings me to ASX-listed education stocks. I’m a firm believer in the long-term potential of education technology (edtech) as more people learn and are assessed online. But the patchy performance of education stocks has tested the faith of true believers.
IDP Education was one of my better ideas. But other education stocks I rated, such as 3PL Learning, have disappointed. Janison Education Group starred in 2021 but tumbled last year. Janison made my recent small-cap list for 2023 on valuation grounds.
Still, it’s clear that some of the big headwinds in the education sector over the past few years – notably, COVID-19 and its effect on enrolments – are easing.
Listed companies directly exposed to international-student trends should have good tailwinds this year. The largest of them, IDP Education, is a terrific business. But IDP looks fully valued for now and is best bought on price weakness.
Some microcap companies also offer exposure to the international-student market. But they don’t have nearly the same profile, market following or size as IDP. That lack of research coverage is an opportunity for investors in microcaps.
A word of caution: by their nature, microcap stocks have higher risk and suit experienced investors. Microcaps can have lower share liquidity and more volatile earnings growth. They do not suit conservative investors.
Also, some private education providers, particularly in vocational education, can be volatile and have poor governance. Too many have burnt investors over the years.
Caveats aside, here are two microcap education stocks to watch:
1. NextEd Group (ASX: NXD)
Formerly known as iCollege, the company changed its name to NextEd in December 2022. NextEd operates 11 education businesses and a global student-recruitment agency.
The company says it educates more than 22,000 domestic and international students annually across its 15 campuses in Australia. NextEd became one of the country’s largest private tertiary education providers after its 2021 acquisition of RedHill Education.
NextEd offers courses in the English language (ELICOS), management, technology, health and community services, and other fields. The business actively recruits international students for more than 350 education providers in Australia and overseas.
As such, NextEd is strongly leveraged to a recovery in international education after COVID-19 as more students return to study here and overseas.
In late January 2023, NextEd positively refined its guidance for the first half of FY23. Revenue will be up to 140% higher than the prior comparable half. Underlying earnings (EBITDA) of up to $6.7 million will be about three times higher.
My main takeout from that announcement was NextEd’s commentary on international-student volumes. The company continues to enrol record numbers of students and maximise its value by offering multiple courses.
NextEd says enrolment in its English-language and vocational courses for the fourth quarter of calendar-year 2022 was 350% above the prior corresponding period.
Care is needed with year-on-year comparisons. Like most education providers, NextEd’s enrolments tumbled during COVID-19. But its enrolment growth since March 2022 has been strong (albeit off a low base). The company confirmed it had about 4,500 new international student enrolments in the December 2022 quarter, up from around 1,000 in the September 2021 quarter.
Perhaps the best sign is NextEd investing in new courses and expanding its campuses in Brisbane, Melbourne and, later, Sydney. Growth in student numbers means extra classrooms are needed. One can see how earnings growth in international education can take off when more students do more courses at the one provider.
NextEd has rallied to $1.27 and some savvy small-cap fund managers have bought its shares. However, I suspect the stock is due for a price pullback or consolidation after recent gains. Still, it’s one to watch as the recovery in international students gathers pace.
Chart 1: NextEd Group
Source: Google Finance
2. Academies Australasia (ASX: AKG)
Investors with long memories will recall when Academies Australasia was a collection of diverse businesses. Then known as Garratt’s, there was the fastener operation, the voice and data recording business and international education.
Academies Australasia is more streamlined these days. The business offers Bachelor degrees, Vocational Education and Training (VET) certificates, diplomas, English-language training and Senior High School preparatory courses.
Academies Australasia says it offers 180 qualifications in campuses across five states, to students from 130 countries. The business also has a Singapore college.
At its Annual General Meeting in November 2022, Academies Australasia said it was disappointed with its after-tax loss of $1.3 million for FY22. The loss was due to COVID-19 and its effect on international-student arrivals in Australia.
More encouraging was Academies Australasia’s news that its performance in the first four months of FY23 was 21% above its budget (EBITDA) and 55% above the previous corresponding period. Like other education providers, Academies Australasia is leveraged to a recovery in the international student market.
After bouncing along the bottom for the past few years, Academies Australasia has begun to rally. Its shares are up 60% since September 2022, but are well down on prices achieved before the pandemic erupted. The market still seems to be overlooking the company’s recent progress and improving outlook.
Academies Australasia has been around a long time and has experienced management. Capitalised at $59 million (at the 45-cent share price), the stock is not for the risk-averse: it suits contrarians who understand the danger of speculating in microcap turnarounds.
I prefer NextEd for microcap exposure to the recovery in international-student volumes in Australia. Longer-term portfolio investors should stick with IDP Education.
But Academies Australasia is worth watching: as the international-student recovery quickens this year and next, the company should become more profitable.
Chart 2: Academies Australasia
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 31 January 2023.
