Navitas goes it alone

Plaudits to Navitas for telling its private equity suitor to 'go jump'. The company certainly put up more of a fight than we expected at the time of Clever bid tactics to snare Navitas.

Since that review management has rejected the BGH consortium's indicative proposal to acquire Navitas at $5.50 a share. It came at a cost: enough shareholders were irritated by Navitas's refusal to engage with BGH that chairman Tracey Horton suffered a significant protest vote against her at the November annual meeting.

But Navitas had at least one thing right. It was untenable for existing shareholders - including Navitas founder Rod Jones - to be bound by consortium agreements to vote against a superior proposal. These agreements meant it was difficult for the company to solicit alternative bids, as the consortium members were bound to vote against them even at a higher price.

Of course, management's decision to take the moral high ground was also self-serving. Nobody wants to lose their job, least of all relatively new chief executive David Buckingham. He lost his last chief executive role when TPG Telecom took over iiNet in 2015, having only been in the job a year.

Buckingham fought back against the BGH proposal with some aggressive profit forecasts. In November he forecast Navitas would produce earnings before interest, tax, depreciation and amortisation (EBITDA) of $200m in 2021, rising to $250m by 2023.

New contracts

If those forecasts prove correct, then our original Buy recommendation will prove right and our subsequent Sell recommendation will prove wrong. Navitas does appear to be winning more contracts with university partners than expected; it has forecast six new contracts will be signed in the current financial year. While new colleges take several years to mature, they will contribute to growth out to 2021 and beyond.

However, there's good reason for scepticism about Navitas's targets. For one thing, forecasts made during takeover battles should always be taken with a pinch - nay, make that an entire cellar - of salt. A year or two down the track, it's all too easy to claim the external environment has changed. Navitas also has form when it comes to shifting the goalposts, as we explained last year.

Also, despite the positive long-term tailwinds that attracted us in the first place, the external environment will remain difficult for Navitas for the time being. The semester three enrolment numbers, released in December, confirm it.

Enrolments in Australia and New Zealand grew by just 2%, although semester three enrolments are the lowest of the year domestically (semester one being the highest). More worryingly, the strength in North American and British enrolments is likely to abate from here.

Temporary strength

In North America, enrolments grew by 7% but that was all down to Canada. The colleges there are bumping up against capacity constraints and US enrolments continue to fall. In Britain enrolments grew by 16% but were driven by European Union students accessing funding before Brexit.

All in all, it's unlikely that the strong growth achieved in Canada and Britain will continue forever. Unless Australian enrolments pick up, Navitas might also struggle to achieve its 3.3% total annual enrolment growth target, especially if the Chinese economy continues to weaken, given the importance of China as a source country for students.

Our most recent price guide is likely too pessimistic, particularly if management continues to sign new contracts. This growth helps support our original Buy case but it's little consolation now we have sold the stock. However the external environment is somewhat worse than we expected two years ago.

The current price, at about $5.00 a share, does not allow for an adequate margin of safety. Given that, we prefer not to devote resources to Navitas and, having sold the stock, we are CEASING COVERAGE.