The IDP Education (ASX: IEL) share price is down 20 per cent to $15.53 this morning after the company reported a full year profit of $66.3 million on 27.2 cent of adjusted earnings per share, but missed analysts' lofty result expectations.
Until today the stock had doubled in value over just 2019 from $9.81 to $19.81 on little news other than a robust interim profit report in February so it seems the valuation is coming back to earth given it still trades on 57x FY 2019's adjusted EPS.
Over FY 2o19 EBIT climbed 28% to $97.1 million on 22.8% revenue growth to $598.1 million.
The company has been popular with investors due to its perceived leverage to the rise of emerging markets higher education and increased demand for English language testing services (IELTS).
However, this is not a scalable software business, it's a services business that is reliant for much of its revenue on repeat IETLS testing for students that fail to achieve a high enough score in the first place to meet their stated objective of a visa or job placement, etc.
IELTS testing is not a business model I'm keen and IDP does not disclose what percentage of revenue is brought about students having to resit tests multiple times.
It is shifting some of the testing to computer based (from the old paper based) format, but the speaking tests for example are still conducted and marked by an IDP examiner in a private room.
In FY 2019 IELTS testing made up 60% of group revenue with a similar proportion in EBITDA.
We can see then that IDP's revenues benefit as more students fail, which is one of my criticisms generally with investing in the for-profit education sector and why I have repeatedly asserted I would not rate this a high-quality business worthy of a 57x earnings multiple.
Moreover, IDP's IELTS testing EBIT, revenue, and volume in Australia and New Zealand is now falling by 25.2% (EBIT) and 7.6% (revenue) in FY19 as the market has been opened up to competition.
IDP claims it has a high customer satisfaction rate, but there are dissatisfied students that have complained about IELTS testing to the media in the past.
I remain bearish on the outlook for this business.
