The ASX small cap with the biggest catalyst during the February reporting season

Investors looking for big upside ahead of the reporting season may want to look at this ASX small cap. That's the view from Morgan Stanley.

The stock in question is the Idp Education Ltd (ASX: IEL) share price. The broker described it as having the "biggest potential catalyst".

The thing that's getting Morgan Stanley excited is IDP's tie up with British Council for the International English Language Testing System (IELTS) tests.

Good results from this ASX small cap

"We expect any deal to unify IDP + British Council distribution of the IELTS test to be highly cost synergistic and have the potential to enhance pricing power," said the broker.

"We calculated c. A$120m synergy potential back in May 2018. We expect any agreement to be a first step towards transformational unified global distribution."

Who would have thought that COVID-19 would turn out to be a good thing for the IEL share price?

COVID not all bad for the IDP share price

The pandemic probably prompted the deal between IDP and the British Council. What's more, the mayhem the virus has caused in the education market will leave the ASX stock with greater market power.

Morgan Stanley believes the IDP share price is well placed to benefit from the COVID recovery too. Firstly, there is significant pent-up student demand, while universities around the world are cutting distribution capabilities to reduce costs due to financial stress.

Overseas student agents are themselves being squeezed with many of these businesses making next to no income. It's logical to assume that IDP will be gaining market share as international student arrivals start to recover.

Buy the ASX small cap before the reporting season

But investors may not need to wait that long to see the IDP share price jump higher. Morgan Stanley believes this could happen as soon as management releases its first half earnings.

It is expecting the company to post a solid bounce in IELTS to between 75% and 80% of pre-COVID levels.

Salary reductions to lower the group's cost base will also contribute to its bottom line and the broker highlighted the potential deep impact of MD student placement volumes of 25% to 30% as another positive.

What the IDP share price is really worth

"In short, we see less of a 2H EBIT skew vs market expectations and expect a positive reaction to the result," added Morgan Stanley.

The broker is recommending the IDP share price as "overweight" (which means "buy") with a 12-month price target of $24 a share.