According to the Department of Foreign Affairs and Trade, education is Australia's fourth largest export. At almost 7% of total export revenue, Australian education providers supplied over $22 billion in education services in 2016.
The education industry may be benefitting from a number of regional and global trends, including the steady rise in number and wealth of the middle class in Asia, and the growing structural changes that are facilitated by digital technologies. Australia's education system has long benefitted from a strong reputation, and there are well over 600'000 international students currently studying in Australia.
The vast majority of these students come from India, China, Korea, Vietnam, and Thailand. The rapid move to provide educational services online will only expand the potential consumer pool, although it may strengthen competition worldwide.
There are two companies that could stand to benefit over the next few years.
Idp Education Ltd (ASX: IEL)
Idp Education provides placement services for international students into educational institutions in Australia, the UK, America, Canada, and New Zealand. Some of the other services that it provides include student counselling, application processing, and English language testing.
Strong earnings growth is forecasted, and the company earns a sizeable return on its invested capital (almost 90% in the trailing 12 months to June). As such, future growth looks strong. The stock currently trades at a PE of 39, and has appreciated over 55% in the last year. While the stock doesn't look cheap, strong growth prospects and good management may be able to provide value for shareholders over a number of years.
Navitas Limited (ASX: NVT)
Navitas is a global education provider that offers a range of educational and training services for students and professionals. Services include University programs, creative media education, professional education, and English language training and settlement services for students.
Earnings growth is forecast for Navitas. Renewal of partnerships with its University partners should also see growth continue, and the company is well positioned to benefit from strategic movements in the higher education sector to expand their footprint into Asia. Navitas earned a 145% return on invested capital in the 12 months to June. Shares currently trade at a PE of 29, and pay a fully franked dividend of 3.6%.
Foolish takeaway
The Australian education sector is strong and is well placed for continued growth on the back of major macro-economic trends. Idp Education and Navitas can both benefit, and have recorded strong returns on their capital in recent years which should underpin growth in the intrinsic value of the business for shareholders over a number of years.
