IDP Education Faces Major Earnings Downgrade, Share Price Plummets
On Tuesday, IDP Education (ASX: IEL) faced a significant earnings downgrade that led to a steep decline in its share price, dropping from $7.47 to $4.02. This slump resulted in an approximate loss of $1 billion in market capitalisation. The international student placement provider has become a target for short sellers, with short interest escalating from 5% in January 2023 to a peak of 17% by May 2024, and currently stabilising around 11%. As a result of these short positions, traders likely profited around $100 million from the decline in stock value.
Challenging Earnings Projections
IDP’s revised guidance for the fiscal year 2025 indicates a worrying forecast: a 28-30% decrease in student placement volumes and an 18-20% fall in language testing volumes, suggesting an EBIT range of $115-125 million. This figure is significantly lower than Goldman Sachs’ earlier projection of $161.8 million as of May 9, marking a shortfall of about 25%.
The company has cited various market challenges influencing its downturn, including:
- United Kingdom: Ongoing uncertainty in immigration policies, with potential new restrictions on student immigration.
- Australia and Canada: Post-election policies perceived as restrictive, negatively affecting demand.
- Canada: A considerable drop in student demand, owing to fluctuating policies.
- United States: A growing sentiment against international students is affecting market conditions.
Adding to these challenges are additional pressures, including:
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Loss of IELTS Monopoly in Canada: Canada’s Immigration, Refugees and Citizenship Canada (IRCC) has started accepting more English proficiency tests for the Student Direct Stream visa, diminishing IDP’s previous monopoly. Competitors may capture up to 30% of IDP’s market share in Canada, which accounts for about 25% of its IELTS volumes.
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UK Policy Changes: Restrictions on dependent visas have caused a 24% decline in student placements.
- Proposed Student Caps in Australia: Plans to cap the number of international students, along with raised visa rejection rates, have resulted in a 25% drop in placements.
Analyst Sentiment Turns Bearish
Following the downgrade announcement, analysts revisited their stock outlooks:
- UBS upgraded its stance from Neutral to Buy, cutting its target price from $12.00 to $4.95.
- Morgan Stanley downgraded from Overweight to Equal-weight, lowering its target from $17.95 to $4.25.
- JPMorgan maintained a Neutral stance, reducing its target from $11.90 to $4.25.
- Macquarie kept an Outperform rating, with a target price slashed from $16 to $6.40.
Macquarie’s report specifically noted significant earnings forecast reductions of 33%, 48%, and 45% for fiscal years 2025, 2026, and 2027, respectively. They now expect a FY25 net profit after tax to be $69 million, down from $104 million, and lowered dividend expectations for FY25-27 by 35-50%. Analysts observed that student placement volumes were disappointing, compounded by government sentiments and visa restrictions in key regions.
Despite the bleak short-term outlook, Macquarie remains cautiously optimistic about IDP’s long-term growth potential, forecasting double-digit growth numbers, albeit noting that immediate momentum is hindered by negative sentiment surrounding student immigration policies.
An additional concern for investors is the potential removal of IDP from the S&P/ASX 100 Index, which could lead to more selling pressure from ETFs and institutional investors.
Conclusion
Market sentiment surrounding IDP Education is notably strained, reflecting the cutbacks in analyst target prices tied to execution risks and earnings uncertainties. While the stock may seem severely oversold, ongoing issues such as an unclear future for FY26, dwindling demand in key markets, and the risk of index exclusion remain prominent.
There are some silver linings: UBS and Macquarie highlight potential cost reductions, maintain strong pricing, and indicate an opportunity for IELTS approval in China. Nevertheless, these positives are largely overshadowed by larger difficulties facing IDP, placing the stock in a vulnerable position concerning any near-term recovery.
