Prior to COVID-19 disruptions, FY20 was shaping up to be a breakout year for IDP Education Limited (ASX: IEL). But could prudent cost-cutting and a pivot to digital see it emerge even stronger after the pandemic?
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Despite a recent blip, the share price of IDP Education Limited (ASX: IEL) has rallied strongly over the last few weeks. Since the beginning of August, shares in the company have surged well over 40% higher to $19.21 as at the time of writing. And while this is still well short of the 52-week high of $25.17 IDP’s shares posted back in February, it is a reassuring sign for a company that has been hit hard by COVID-19 travel restrictions.
IDP Education organises study placements for international students. Prior to the COVID-19 pandemic, IDP was on an exciting growth trajectory. By February, FY20 year-to-date revenue had already surged 22% higher year-on-year to $480 million, driven by increasing student volumes. The company was also strengthening its sales pipeline, with applications up 42% year-on-year.
All this meant that FY20 was shaping up to be a breakout year for IDP. And the market agreed: in the 2 weeks after its first half results announcement in February, IDP shares skyrocketed almost 50%.
But then COVID happened, and just as it seemed like things were really starting to get going, the wheels fell off. In April, the company was forced to admit that the measures governments were putting in place to halt the spread of coronavirus were having a material impact on its operations. Schools and universities in its destination markets (like Australia, the UK and the US) were closing, and international travel was being severely restricted.
Despite reassurances by the company that it was cutting costs and making efforts to strengthen its balance sheet, the share price collapsed – dropping as low as $9.90 by mid-March. A year that was shaping up to be the best in the company’s history was fast turning into one it would sooner forget.
So, what changed?
Investors responded favourably to IDP’s full year results announcement, released to the market in the second half of August. The company reported an 11% year-on-year uplift in earnings before interest and tax to $107.8 million, while net profit after tax and amortisation rose 3% to $70.4 million.
Additionally, IDP delivered on the promises it had made to shareholders back in March. The company ended FY20 with over $300 million in cash, thanks to a $254 million equity raise and a $175 million working capital facility. It also slashed overhead costs by $35 million over the second half of the financial year.
IDP also boosted its online and digital presence in response to COVID-19. Many of its International English Language Testing System (IELTS) in-person centres were closed due to the pandemic, so IDP rolled out an online alternative that still allowed students to progress their study applications during lockdowns.
Should you invest?
With restrictions on international travel still likely to persist well into 2021 – not to mention the stop-start way many economies are trying to emerge from COVID-19 lockdowns – the road ahead could still be very bumpy for IDP, particularly over the near-term.
However, the company is flush with cash at the moment and it is managing its costs responsibly. It also still has a strong sales pipeline with demand for overseas study from international students remaining robust throughout the pandemic. So, although there is still plenty of risk, IDP Education is doing everything it can to position itself for a strong rebound once international travel restrictions ease.
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Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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