IDP Education (IEL) - Opportunity to create significant shareholder value

Zach Riaz

Banyantree Investment Group

In a recent meeting with IDP Education (IEL), we explored the opportunity for management to unlock significant value in the IELTS (International English Language Testing System) business. 

IEL background. IEL has been operating for over 30 years and is a global leader in international education services. IEL also part owns IELTS, the world’s most popular high-stakes English language test.

IETLS. IETLS is the world’s leading high stakes English test, tests which are taken for life changing events ( e.g. university admission or government work visas). There are only a few large players in this market globally, given the high barriers to entry to operating such testing operations, which include:

(1) require an extensive globe distribution network given at home testing or remote testing is not allowed for security reasons (note - despite the push back, remote testing may be introduced down the track which also improve the economics for IELTS) 

(2) academic integrity backing the tests, which must be globally relevant, culturally agnostic and provides consistent assessment; and

(3) the tests need to be recognised among universities, governments, and other stakeholders).

Industry growth. The industry is driven by long-term structural trends – international university enrolments in English speaking countries and work migration for governments. IELTS holds approximately 60% of the market share, with the remaining market consisting of non-for-profit operated TOEFL (Test of English as a Foreign Language) (#2 player globally), Pearson and British Council.

IETLS ownership. The intellectual property (test questions, exams etc.) is jointly owned by Cambridge University, British Council and IDP Education. British Council and IDP Education are the exclusive distributors of the test (set the price, sell, administer, and distribute) around the world and generate profits. Cambridge’s role is to prepare the test (content, questions, test integrity etc.) for which it earns a royalty fee per test.

British Council (BC) vs. IDP Education. BC is a charitable organisation which is part of the British government and funded by the government. BC has established activities in over 100 countries and is effectively mandated to spread the English language, society, and culture aspects. IETLS has become the largest commercial revenue generator for BC, which funds BC’s other activities (pay for charitable and non-commercial activities and reducing the need for government funding).

Despite the joint ownership of IETLS, at the day to day operating level, BC and IDP Education are competitors - effectively compete in all the global markets and sell the same exact product. This makes BC IDP Education’s largest competitor.

Pricing is largely stable in the industry and therefore market share / volumes are driven by tactical strategies such as location of the test centres (convenience / close to schools or universities) and having strong referral partners (prep schools, language schools). Generally, the markets where IDP Education competes directly with BC, IDP tends to have the higher market share (~50% on the product), with market share slowly increasing over the years.

What if the BC and IDP Education IELTS operations consolidated? Whilst the current operating model has worked well over the past 30 years, going forward it may be time to consider a more optimal single distributor model and optimise returns. Synergies opportunity are extensive given they sell the exact same product – distribution structures can be consolidated, one contact for referral agents, one set of trained examiners for the spoken component and general overhead costs. Therefore, there is a strong strategic rationale for restructuring the distribution arrangements. This does represent a meaningful medium-term opportunity.

It will require some restructuring and given it involves dealing with a quasi-government agency which can be very slow or hard to move on such significant matters (especially given IETLS provides significant revenue for the BC). However, the lock-downs due to COVID-19 (potential of a second global wave), budget pressure on the UK government (potential funding cuts to quasi-government agencies?) and internal financial pressures may be the motivation required for the BC to act. In our view, this is a glaringly obvious opportunity for all parties to come out of the COVID-19 in a stronger position.

Based on our discussions, we have attempted to quantify the benefits from this potential consolidation. We present the potential uplift in revenue and gross profit over a 10-year period (your typical DCF model timeframe) in the chart below. Suffice to say there is a significant opportunity to lift earnings (more than 30%) based on our estimates. Key assumptions: (1) minimum impact at the volume line, however we expect ongoing market share growth given improved relationship with referral partners due to size; (2) pricing improves by 100bps on our original estimates (which was between 2.5 to 3.0% p.a.); (3) significant uplift in margins from sites consolidation (especially BC’s less inferior sites), more volume pushed through existing centres and increasing use of technology (e.g. remote testing).

Source: Banyantree, Company

Very strong balance sheet and liquidity position. Coming into COVID-19, the Company had approx. $20m in net cash on the balance sheet and operating cost structure of approx. $21m per month. Recently the Company raised approx. $260m in new equity and secured a $175m working capital debt facility. The Company has also reduced its operating cost structure down to approx. $16m per month. This provides the Company with significant liquidity to trade through current disruption and potential second wave, in our view. This also puts the Company at a competitive advantage in terms of access to capital and could accelerate market share gains.

Global conditions are challenging for IDP Education at the moment, but there are opportunities available to the Company to unlock value and it has the balance sheet capacity to ride out the current downturn. 

Get investment insights from industry leaders

Liked this wire? Hit the follow button below to get notified every time I post a wire. Not a Livewire Member? Sign up for free today to get inside access to investment ideas and strategies from Australia’s leading investors.

PLEASE NOTE - The content above is general in terms and does not take into account your objectives, financial situation or needs. You should always consider your unique personal circumstances and seek professional paid advice before making investment decisions. Past Performance is not an indication of future outcomes. Disclaimer This document is provided by Banyantree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyantree”). The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgement and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Banyantree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyantree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Banyantree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyantree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyantree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyantree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyantree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyantree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyantree.

1 stock mentioned

Investment Manager / Director
Banyantree Investment Group

Investment Manager and Director at Banyantree Investment Group, with responsibilities across equity and multi-asset strategies. Zach has over twelve years’ experience including portfolio management and sell-side investment research.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.