Navitas's target practice

Recent Australian enrolment figures suggest Navitas’s targets for 2020 – outlined at its Investor Day – might be conservative.

If you're looking for like evidence that students want to attend Navitas’s university pathway colleges, simply review the company’s enrolment figures. Three times a year – the latest on 30 March – the company publishes how many students have enrolled in a Navitas course. With just over 19,000 enrolments, semester one of the 2017 year produced the third-highest number ever (see Chart 1).

Semester one is typically the company’s largest student intake. It reflects the start of the university year in Australia, a market which accounts for 53% of Navitas enrolments. But this year’s figure was impressive for two reasons.

First, it shows the negative effect of closed colleges is wearing off. Excluding closed colleges, growth in student enrolments was 8%. It’s more evidence of the underlying growth outlined in Navitas: Interim result 2017.

Key Points

  • Australian enrolments surging

  • Targets set for 2020

  • Vocational education expansion likely

Second, Australian and New Zealand enrolments were up a whopping 14% in semester one. On the company’s recent ‘Investor Day’, management attributed this to two things – an increase in domestic students, and Australia being the beneficiary of a less certain migration climate in the UK and US. Management expects both trends to continue in the short term.

The enrolment figures for other destination countries confirmed that story. Enrolments grew by 4% in North America but that was all driven by Navitas’s two university partnerships in Canada. UK enrolments grew by just 1% as Britain’s restrictive visa environment continued, although there are some early signs the rules for students might be relaxed.

Aiming low?

So if underlying enrolments in its University Partnerships division are growing by 8%, why is management aiming for a much lower 5% annual target out to 2020? This was just one of the so-called ‘key performance indicators’ provided at the Investor Day last week.

Like a lot of Navitas’s other targets, we suspect it’s conservative. Indeed, managing director Rod Jones admitted as much. But with Navitas having produced a few disappointments in recent years, conservative targets are better than aggressive ones.

Also conservative – we believe – is the goal for the University Partnerships division to sign five new agreements by 2020. As management previously mentioned it was in negotiations with about a dozen US institutions, it doesn’t seem like a stretch target.

Thankfully it’s not necessary for Navitas to enter new agreements to increase enrolments. It has plenty of capacity with existing university partners, with a couple of exceptions: its older campuses in Australia are generally approaching full capacity, as are its two colleges in Canada. Like Australia, Canada has a policy of welcoming international students, so new agreements are a priority there.

Funnelling students to campuses with additional capacity should help lift margins over time. This was another of the targets outlined at the Investor Day – management intends to lift the group earnings before interest, tax, depreciation and amortisation (EBITDA) margin from 16% to 18% by 2020.

Achieving that margin will be a little more difficult following the loss of some of the Adult Migrant English Program (AMEP) contracts, which fell under Navitas’s Professional and English Programs Division. As outlined in Navitas loses contract last month, the ending of these contracts from July 2017 will cause Navitas’s EBITDA to fall by $12–14m a year. Management didn't provide much information about the contract loss, other than saying they generated ‘reasonable’ (read: high) margins.

Spare capacity

Even so, an 18% group EBITDA margin by 2020 looks within reach. What might be a little more difficult is lifting SAE’s margin from 14% to 20%. Management has done a lot of work with this division – which offers courses in creative media – but there’s more to do. In the US, some campuses are woefully underutilised, so increasing student numbers is a priority.

Table 1: Management targets
  By 2020
Revenue growth (group) p.a. 3%*
EBITDA margin (group) 18%
EBITDA margin (SAE) 20%
Enrolments (UP) p.a. 5%
New agreements (UP) 5
* 5% excluding AMEP reduction  

With the Professional and English Programs division being eviscerated by the loss of some AMEP contracts, Navitas has taken the decision to merge the division with SAE. The new division, called Careers and Industry, will be restructured to be mainly a provider of employment-related educational courses.

The division will initially consist of existing Navitas colleges, such as SAE (creative media), ACAP (psychology, counselling and youth work), NCPS (criminology and justice) and HSA (nursing and aged care). The portfolio is likely to be refined over time and Jones has said several times now that there might be opportunities in vocational education.

With the shakeout in the vocational education continuing, we think Jones is hinting that Navitas might make acquisitions. Navitas’s size and reputation could bring some much-needed stability to the sector, something we imagine the current government would support. We can envisage a time when Navitas is the largest private alternative to TAFE colleges.

Nothing ventured….

The final major announcement to come out of Navitas’s Investor Day was the establishment of Navitas Ventures, which management says will investigate ‘next generation education focused initiatives’. Management was careful to explain that it’s not a venture capital fund, although the company might allocate $10m a year to any opportunities that arise. It's too early to tell whether Navitas Ventures is a management flight of fancy or a way to keep on top of industry developments, but you can see some of the issues management is thinking about on the Navitas Ventures blog.

All up the Investor Day didn’t reveal anything particularly revolutionary, although it was good to see management setting some targets for the next three years. The targets support our investment case and, if achieved, we expect decent returns from the stock. If management’s targets turn out to be conservative, then Navitas will be a better-than-expected investment.

Of course, we’re mindful of recent disappointments. Following the loss of the AMEP contracts, Navitas will report another year of flat EBITDA in 2018 (the company’s fifth in a row). The long-term partnerships with Deakin and Curtin universities are also up for renewal this year and, while management is confident of retaining them, the loss of one or both would cause the share price to drop.

Navitas is a top-notch business with some very favourable tailwinds, notwithstanding occasional contract losses and a difficult international migration climate. We continue to believe the market is underpricing the stock based on the company’s long-term potential, despite the likelihood that 2018 will be the fifth year of flat earnings. Our recommendation remains BUY.

Disclosure: The author owns shares in Navitas.