Navitas Limited (ASX: NVT) was formed in 1994, when it was cofounded by current CEO Rod Jones and non-executive director Peter Larson. Both are significant shareholders today, holding about 12% and 6% of shares on issue respectively. The company has a market cap of $1.8 billion and is a major global education provider with 80,000 students in 27 countries.
Back in 1994, Rod and Peter identified a gap in the higher education market. They noticed that international university students were struggling due to difficulties assimilating into Australian culture. They set up pathway programs in partnership with universities to improve success rates of foreign students. The University Programs division remains Navitas' largest, and consists of 32 pathway colleges with a growing presence in the UK, Canada, the US and elsewhere.
The other two divisions under the Navitas umbrella are SAE and Professional and English Programs. Navitas purchased SAE in 2010 for $289 million, and it offers courses in creative media at more than 54 colleges across the world. The strategy is to diversify SAE vertically and horizontally, by offering both more qualification levels and subjects.
The Professional and English Programs division provides assistance primarily to migrants and refugees looking for work and wanting to learn English. It is complementary to University Programs which also provides help with English language skills.
Pros
- Navitas receives upfront fees for its programs and so cash flows are consistently ahead of profits whilst the business is growing.
- It pays a healthy 4.2% dividend yield and has a target pay-out ratio of 80% of profits.
- Demand for Western tertiary education is expected to grow due to the rise of middle classes in the developing world.
- According to Rod Jones, creative media is the fastest growing education segment in the world.
- The Navitas business model is unlikely to be threatened by Massive Open Online Courses (MOOCs), since many creative media courses are practice based and difficult to learn online. Also, pathway colleges offer a route to migration for international students.
- Navitas has flourished for more than 20 years under the leadership of Rod Jones who is clearly passionate about the business.
Cons
- The current share price isn't cheap at around 18x my estimated current free cash flows.
- Governments in Australia and the UK have recently tightened immigration laws which has stifled growth in foreign student numbers. The changes in Australia have also impacted the Professional and English Programs division. Legislative amendments represent an ongoing regulatory risk to the business.
- A recent contract loss with Macquarie University has cost Navitas over $30 million in write downs over the past year. The cash impact will not be felt until the second half of 2016, but is not very significant given it represents the loss of just one of 32 pathway colleges. The reason for the contract termination is that Macquarie is opening its own pathway college, and there is a risk that other universities will follow suite. However, aiding the integration of foreign students is not a core competency of the average university and I believe many will continue to operate in partnership with Navitas.
Foolish takeaway
Even if Navitas loses further pathway colleges, there are still many opportunities available for growth in Europe and North America. I like companies with founder CEOs and own a number of these stocks including Flight Centre Travel Group Ltd (ASX: FLT) and Servcorp Limited (ASX: SRV). Navitas is a little too expensive for me currently and I would only consider buying at under $3.50 per share.
