Australia has three sheep for every human being, but we haven’t ridden on the sheep’s back for quite a while. In fact, wool exports haven’t dominated our economy since the 1960s.
You won’t be surprised to learn our top three exports these days are iron ore, coal and natural gas. But what about the fourth? Could it be livestock, dairy products, or perhaps tourism?
Actually it’s none of those. Education comes in at number four, although tourism isn’t far behind. Australia is now the third largest education exporter in the world behind the US and the UK. In 2014/15 education services provided to international students contributed more than $18bn to Australia’s economy, up 14% from the year before.
Direct spending on education isn’t the only way Australia benefits. In June, there were more than 460,000 international students studying locally. That’s a lot of students paying rent, buying coffees and using public transport (they pay full price too, because they’re not entitled to student concessions).
Navitas on sale?
Despite all this, the ASX-listed education sector is doing it tough. The share price of university pathways provider Navitas (ASX: NVT) has almost halved since last year’s peak.
Online employment classifieds business Seek (ASX: SEK) has suffered some problems in its Seek Learning division too, with its stock declining by 35% since February. This comes in spite of the success of its two other education businesses, Swinburne Online and IDP Education.
In fact, IDP Education has been so successful that Seek is planning an initial public offering later this year. IDP, which specialises in international student placements, looks like an interesting business and Intelligent Investor intends to review the float.
Many of the sector’s more recent problems stem from growing pains. Unscrupulous education providers and marketers were encouraged by various regulatory changes, only to fall foul of subsequent government crackdowns. Most recently, the VET-FEE HELP reforms have smashed the share prices of some of the smaller ASX-listed players (sometimes justifiably).
Nevertheless, the positive attributes of the sector remain intact. Education has always been a reputation business, so high quality courses will attract students.
The expanding Asian middle class values education highly. With prestigious universities, safe cities and an attractive climate, it’s no wonder Australian education is in demand.
Also benefiting the sector is the much lower Australian dollar. Many international students now find Australia 30% cheaper to study than in 2012.
These ‘pull’ factors suggest demand from Asian students in particular is likely to continue.
For shareholders, education businesses can be very profitable when run well. They typically require relatively small amounts of capital to set up and costs tend to be fixed once established. In 2015 Seek’s education division made an EBITDA margin of 26%, while Navitas generated a still-respectable 17%.
Unfortunately these types of numbers have been rare. Too many newly listed education businesses have reported disappointing results soon after listing. Their poor performance has earned the sector a somewhat shonky reputation.
As value investors, we’re attracted to out-of-favour industries. Despite excellent long-term tailwinds, the ASX-listed education sector is currently unloved. We’re doing some work to determine whether there are any buying opportunities.
In the short term, there could be more pain as government reforms flow through. But as the private education industry matures we expect a number of large and reputable providers will emerge.
In an industry where prestige, reputation and brand matter more than most, upstart education providers have too often ignored exactly those traits. For investors, their behaviour is creating opportunities in the companies that haven’t.
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Disclosure: The author owns shares in Seek.