IDP Education: the second-most shorted ASX stock

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Australia is a nation of migrants, and since 1986 the steady but small stream of international university students exploded when the Australian government allowed universities to accept full-fee paying international students, creating a booming industry pretty much overnight.

A fundamental key to visa applications for skilled & unskilled workers, students, and other visa types is the language test, otherwise known as the IELTS (International English Language Testing System).

Australia’s only remaining listed IELTS provider is IDP Education. It’s recently been one of the most shorted stocks on the ASX – but does it deserve to be?

IDP Education is the second most shorted stock on the ASX

Recently IDP Education was the second most shorted stock on the Australian Securities Exchange (ASX) – and only because the price of Lithium had tanked continuously over the prior six months, putting Pilbara Minerals in first spot.

Students applying for a “Student Direct Stream” visa (standard for Canadian university entry for international students) could now choose from 4 additional tests apart from IELTS. Their share price immediately dropped by 16%.

In the interim IDP’s FY23 financial results were released – and they were great! So after great results and a pretty hefty share price drop, why is it still being shorted?

IDP Education’s history

In 1969 Vice Chancellors of Australian universities created the awkwardly-acronymed AAUCS – the Australian-Asian Universities’ Cooperation Scheme, to help universities in Singapore, Malaysia and Indonesia improve teaching and research standards. It went through a few name and mission updates over the following 25 years:

• 1981: Australian Universities’ International Development Program – renamed, becoming more professional with an actual funded office rather than in-kind contributions from universities.
• 1984: International Development Program of Australian Universities and Colleges Ltd (IDP) – recruitment of full-fee paying international students for Australian universities began, and with it the necessary service of counselling of those students. At this stage IDP was still a Not For Profit enterprise.
• 1989: IELTS launched, a collaboration between Cambridge Assessment, the British Council, and IDP – that’s right, IELTS is 1/3 owned by IDP!
• 1996: IDP Education Australia becomes wholly owned by 38 Australian universities (via a holding company Education Australia Pty Ltd).
• 2006: SEEK Ltd (you know, the job search website) acquired 50% of IDP for $35.9m.
• 2015: IDP lists on the ASX, with Seek selling it’s entire 50% stake for $331.6m – a VERY tidy return. The offer price was $2.65 but was immediately trading more than 60c higher.

IDP Today

IDP has come out of Covid at high speed. In FY23 they achieved record revenue of close to $1b, a CAGR of 10.4% from pre-Covid times. They’re return to paying quite decent dividends and have recovered and even grown their revenue share derived from Asia. It’s also become much more profitable – EBIT Margin is up to 22.5% in FY23.

Those are some healthy numbers. So let’s revisit the news that spooked the market and kept the short-sellers expecting much more than a 16% drop in IDP’s market value:

Goldman Sachs estimated that Canada opening up the English language test market for would cut IDP’s revenue related to those students by 30%. IDP classifies Canada in “Rest of the World”, including Argentina, Azerbaijan, Bahrain, Brazil, Canada, Chile, Colombia, Cyprus, Ecuador, Egypt, Germany, Ghana, Greece, Iran, Ireland, Italy, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Mexico, Morocco, Nigeria, Oman, Pakistan, Peru, Poland, Qatar, Romania, Russia, Saudi Arabia, Spain, Switzerland, Türkiye, Ukraine, Uruguay, Uzbekistan, the United Arab Emirates (“UAE”), the United Kingdom, and the United States of America.

Placement volumes for students going to Canada grew by 34% in FY23 (wow), but would have been more except for visa processing delays and visa rejection rates. Looks like Canada was struggling to keep up with visa demand, just like Australia. For the Language testing business, revenue from Indian students taking the test actually fell, and this was also due to Canada. Less Indian students wanted to study in Canada – and this was well BEFORE the diplomatic row between the two countries.

Let’s look at a scenario in which IDP’s revenue related to Canada does actually drop by 30%. We don’t know exactly how much of “Rest of the World” revenue Canada makes up, so let’s assume a worst case scenario – that Canada is all of that revenue – that would be $216m, which would give an average EBIT of $48.6m. A 30% loss would therefore be worth $14.6m. That is, absolute worst case, 1.5% of Revenue – losing that EBIT would still put FY23 results 1 whole percent above prior year …

This impact is not big, or at least not big enough to justify a 16% share price drop with expectations of more. So what else is going on?

IDP’s big risks

FY23’s bumper result was driven by international students returning to all universities worldwide post-covid. But Canada’s removal of the IELTS monopoly for certain visa types has a minimal effect on IDP.

The large risk for IDP is that removal of that monopoly has happened before – in the spiritual home of IELTS, the United Kingdom. When the UK did essentially the same as Canada and began accepting other language tests, IDP lost 10% market share. That’s 10% market share in the United Kingdom, one of the most popular places for international students to study.

If IELTS lost its monopoly in the UK and Canada, then where's next?

And potentially losing its monopoly is not the only problem. Customer demand is at risk as the massive intake of students and other immigrants worldwide post-covid is causing governments to re-evaluate policy settings regarding immigration:

• Australia: implementing higher IELTS score requirements, and are granting 35% less student visas.
• Canada: reducing foreign study permits by 35% to reduce impact on housing.
• United Kingdom: planning to reduce its migrant intake by up to half by restricting student numbers, as well as families of essential migrant workers (eg healthcare).
• The Netherlands: no new English-language Bachelor’s degrees will be developed.

This trend is also occurring in some non-IELTS countries – France will restrict availability of state assistance for students to those living in France for an extended period (several months to several years).

Because Australia’s university system has become quite dependent on fees paid by international students, they are preparing for the worst after enduring Covid with minimal to no government support. What do you do when one of your largest income streams is reduced dramatically? Australian universities know exactly what happened:

Australian university net profits plummeted by $1.6 billion to just $669 million in 2020—the lowest since 2009. Fifteen of the 38 universities reported a deficit in 2020, with most barely breaking even and only three universities reporting significant surpluses.        

If student demand is throttled, the flow-on impact to providers such as IDP will also be ENORMOUS, and because IDP is doubly exposed because they service both testing and placement demand, this will hit them hard.

Are the short-sellers right? They've certainly identified the actual problem that's coming down the pipeline for IDP. We'll need to wait to see how big that problem is.

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👋 Hi, I'm the founder of Ascern Advisers. We do Strategic & CFO advisory for businesses with Growth Potential. DM me or email me at david@ascern.com.au if you want to chat.