With high growth in the number of overseas students studying in Australia, education companies will benefit from this boom, though a first-half dive in profit has pushed Navitas (ASX: NVT) shares back towards Morningstar's fair value.

Shares in Navitas dropped after the education provider last week announced first-half net profit dropped to $24.7 million in the six months to 31 December, down 54 per cent from a year ago. Group revenue fell 5 per cent while earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 13 per cent compared to the same period a year ago.

The company said its profit was impacted by the loss of earnings following the termination of Macquarie University contracts and the conversion of Edith Cowan College (ECC) to a joint venture, as well as a $7.5 million devaluation of tax loss assets in the US as a result of recently passed tax cuts.

Shares in Navitas dropped to a three-month low of $4.75 on 30 January and fell again on 31 January to a fresh low of $4.62. Since then the shares have rebounded to around $5.00.

According to CommSec, the result was impacted by substantial one-offs which have muddied the result and can make comparing the numbers with the prior year "challenging".

Gareth James, a senior equities analyst with Morningstar, agrees and says Navitas's first-half result was in line with his expectations. He has maintained his earnings forecasts, even increasing his fair value estimate slightly to $4.65 from $4.58.

According to James, the long-term trend remains positive for Navitas.

"We're seeing strong growth in international student numbers--people are changing the way they think about education. People are changing their careers more quickly. Industries are being disrupted and people are generally thinking about life-long learning. All of this is good for the tertiary education sector and Navitas," says James.

Underlying trends within Navitas's University Partnerships division, which comprises around 75 per cent of group EBITDA, are encouraging, with revenue increasing by 11 per cent versus the prior period and EBITDA by 12 per cent excluding lost contracts.

"Although the use of 'underlying' financial results can be highly subjective, in this case we believe it's justified, as we don't think further contract losses are likely," says James.

"Since Macquarie University announced it would insource its university pathways programme in 2014, Navitas has been converting contractual agreements into more sustainable joint ventures where possible, in addition to renewing existing contracts. This program is progressing well, and we expect the three remaining contracts to be renewed over the next 12 months."

The strong growth in overseas student numbers has benefitted both Navitas and fellow education services provider IDP Education (ASX: IEL).

IDP provides international student placement services and English language testing services. It also owns and operates English language schools in South East Asia and organises educational events and conferences globally.

Stockbroker Morgan Stanley likes both Navitas and IDP, which have outperformed the overall share market in recent times, with the expectation this will continue.

"We see earnings certainty underpinned by strong student visa data. IDP continues to be our preference to play the underlying thematic, but Navitas could surprise to the upside in 2017-18," the stockbroker said in an 18 January 2018 report.

"In the past six months, IDP's stock has gone up 27 per cent (versus the All Ordinaries Index at 7 per cent), while Navitas has gained 11 per cent. We lift our price target by 9 per cent for IDP to $6.50 and by 12 per cent for Navitas to $5.05, both driven by incremental upgrades to our forecasts and our view that the re-rating is here to stay," said Morgan Stanley.

Morgan Stanley prefers IDP over Navitas due to its faster growth trajectory, greater exposure to international education, and lower risk. IDP shares were quoted at $6.03 in early February.

Both companies are riding the surge of overseas students coming to Australia to study. Education is big business for Australia, being the country's third-biggest export income earner, generating around $29 billion a year, according to the Department of Education and Training.

China is the largest source of international students at 28 per cent, followed by India at 11 per cent. Over the year to November 2017, international student numbers jumped to 621,192 from 550,289 over the calendar year 2016, according to data from Austrade.

Most of these students are enrolled in higher education organisations such as universities, followed by enrolments in vocational education and training. English language courses are also popular.

More from Morningstar

• Thoughts on the Wall St correction 

What should you do about the market slump?

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.