Navitas: 2016 result

Navitas’s flat profit was good in the circumstances, and the longer term outlook is a little more secure.

In July 2014, Navitas’s share price fell 30% when Macquarie University announced it would take its student preparation program back in house from February 2016. The announcement of Navitas’s 2016 result – incorporating the loss of Macquarie and another college, Curtin Sydney – showed the financial effect to be much more modest.

Operating profit before depreciation and amortisation (EBITDA) from its main division, University Partnerships (formerly University Programs), fell just 2% to $137m. Helped by earnings growth of 19% and 9% from its Professional and English Programs and SAE divisions respectively, the company’s total EBITDA was more or less flat (see Table 1).

Underlying net profit fell slightly, while total dividends were maintained at 19.5 cents for the year. It was a reasonable result, confirming our view from Navitas’s school of hard knocks that this is a good business.

Key Points

  • Flat result as expected

  • Nine agreements signed or renewed

  • Growth to return in 2018

Management is forecasting 2017 EBITDA to be similar to last year’s result. The effects of the closure of the Macquarie and Curtin colleges will continue into the first half. Longer-term, we expect growth to improve as Navitas signs up more universities in North America in particular. Admittedly progress has been slow, with management lamenting that ‘decision-making is not fast’ at universities.

There are two main risks with Navitas. The first is that pushing sub-standard students through to degrees at partner universities could end up damaging its business. Maintaining and improving academic quality is something management is firmly focused on.

Table 1: Navitas result 2016
Year to 30 Jun 2016 2015 /(–)
(%)
Revenue ($m) 1,011 980 3
EBITDA ($m) 165 163 1
NPAT ($m) 90 91 (1)
EPS (c) 24.0 24.3 (1)
DPS (c) 19.5* 19.5 N/a
Franking (%) 100 100 N/a
* 9.9 cent final dividend, 100% franked, ex date 31 Aug
Note: Figures are underlying results

The second (and related) risk is that partner universities will occasionally take their programs back in house, as Macquarie did this year. But the fact that four new university agreements were signed and five renewed during the 2016 year inspires confidence that Navitas continues to generate significant value for its partner institutions. Or maybe they’re just in it for the cash.

We’d been concerned that long-standing partner Edith Cowan University in Perth might be planning to take its program in-house, particularly as its agreement was only renewed for six months in June. On the conference call management reassured that the extension was simply to provide time to negotiate its third joint-venture agreement. Management expects the university’s hierarchy to approve the deal next month.

Now that the relationship with Edith Cowan University is a little more secure, our confidence has increased. Unfortunately so has the share price, with the stock up 20% since Navitas’s school of hard knocks.

We said then that we were perhaps being too conservative, and that our $4.00 Buy price had an ‘upward bias’. With our confidence having improved, we’re lifting that to $5.00, and our maximum portfolio weighting to 5%. We’re on the lookout for an opportunity, but the recommendation remains HOLD.

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