Ask the analyst: Are IDP Education's woes temporary?
The global education services provider has gone from stock market darling to one of the ASX's weakest performers. What gives?
Ask the analyst puts questions from Morningstar users (and occasionally myself) to our Australian equity research team. If you have a question about an ASX200 company or industry in our coverage, please email it to [email protected].
Today’s question
Today’s question came from Morningstar reader Chris, who asked:
“Several countries seem to be tightening their immigration policies. Could this lead to a permanent impairment of IDP Education’s market opportunity? What gives your analyst confidence that the slowdown is temporary?”
Let’s start, as always, with a quick review of IDP’s business.
An education services heavyweight
The vast majority of IDP’s revenue and profits come from two segments: English language testing and student placement services.
The language testing business is underpinned by IDP’s one-third ownership of the IELTS English test, a leading hallmark of English proficiency accepted by educational institutions, employers and migration authorities worldwide.
On the placements side, IDP matches students from emerging economies such as India and China with courses from partner institutions in Australia, the UK, Canada, New Zealand, the US and Ireland. In return, IDP receives a cut of the tuition fees paid to the institution.
The English language testing generates just below half of IDP’s revenue and roughly a third of IDP’s gross profits. Meanwhile, the student placement services business generates roughly half of IDP’s revenue and almost two-thirds of IDP’s gross profits.
IDP’s recent share price troubles – the stock is down more than 50% in the past twelve months – can largely be put down to concerns over the outlook for its placements business. So we will focus on that.
Problems with IDP’s main growth engine
IDP’s student placement business has been a huge success, growing from $92.4m and around a quarter of group sales in fiscal 2016 to $508.3 million and over 40% of group sales in fiscal 2024. With gross margins of around 80%, this segment is also more profitable than IDP’s language testing business and has therefore been the main driver of earnings growth at the group level.
The first real hit to revenue in this segment came from the pandemic. Up until this point, placements of students into Australian universities still made up over half of total placements. Yet almost overnight, foreign student entries were blocked as Australia shut its borders.
Figure 1: Growth of IDP's student placement business. Source: Morningstar, Datawrapper
Some of this pain was offset by continued growth in placements outside of Australia, most notably into British and Canadian institutions. And taken with a strong rebound in Australian placements post-pandemic, IDP’s total student placement revenues had eclipsed pre-pandemic levels by fiscal 2022. By the end of fiscal 2024, they were nearly double those seen in fiscal 2019 - a strong recovery by all accounts.
After navigating the Covid period, however, a bigger problem emerged: governments in IDP’s three major destination countries (Australia, Canada and the UK) all took steps to reduce foreign student numbers as part of a broader effort to curtail net migration.
IDP responded to these policy headwinds by guiding to a 20-30% decline in student placement volumes in fiscal 2025 into its key Australia, UK and Canada markets and a 15% fall in English testing revenues, which are often linked to education and visa applications.
The question, then, is whether this tougher policy environment presents a temporary or permanent threat to IDP’s business.
Cyclical or permanent?
Our analyst Shane Ponraj sees the tougher environment for IDP’s student placement business as being cyclical rather than secular.
He thinks that the key reasons behind tighter policies on immigration and foreign students in IDP’s key markets were in themselves cyclical. Chief among these were the cost-of-living pressures experienced from 2022, and the fact that Australia and Canada were approaching general elections.
Looking forward, these factors could be overturned by more secular trends – primarily the aging population, declining base of skilled workers and taxpayers, and reliance on immigration for economic growth seen in IDP’s key destination markets.
Shane thinks that this could support a normalisation in policy towards immigration and foreign students in time. For example, he expects the current temporary student caps Australia and Canada until 2027 will prove to be just that – temporary.
The ‘demand’ side of IDP’s placements (and indeed language testing business) also seems to have secular trends in its favour. Key source countries, which include India and China, are set to experience further middle-class population growth, boosting the pool of potential students.
Shane also points to IDP – and the broader industry’s – ability to deal with downturns and uncertainty in the past.
Covid-19 delivered a huge shock to Australian placements, yet sales in this business and IDP’s total revenue have rebounded strongly. There have been several other potential threats over the years, from Brexit to increased Australia-China tensions. Yet the number of students from IDP’s source countries has grown at roughly 7% per year over the past twenty-plus years.
Competitive position and pricing outlook look good
While it has undoubtedly been a tough couple of years for the student placement industry, IDP has at least coped better than its peers.
In fiscal 2024, IDP’s volumes were down 15% compared to an industry-wide slump of 28%. IDP’s volumes in the first-half of fiscal 2025 fell at a similar rate to those in the industry on a global basis, but this narrowing in outperformance was due to abnormally slow visa approvals in IDP’s crucial Aussie market.
Shane expects that IDP can get back to outperforming the industry. He thinks it has a solid competitive position in placements thanks to its track record of high visa acceptance, and benefits from traces of a network effect here due to the number of students and institutions that it brings together.
Shane also makes the point that capping foreign student numbers could have another effect besides lower placement volumes. After all, if universities aren’t allowed as many students, they may well continue to increase the fees charged to each student and seek higher quality applicants.
This could underpin a solid pricing outlook for IDP and help it offset some of the near-term weakness in volumes by earning more per placement. This was visible in the company’s first-half results, with average revenue per student up 14% against the first half of fiscal 2024.
The lowdown
While the current environment for student placements certainly isn’t ideal, Shane sees definite potential for a medium-term rebound and for IDP to fare well against the competition.
Shane’s Fair Value estimate of $22 per share assumes that IDP’s sales growth can resume from 2026 onwards and average 9% per year from now until 2029. This, in turn, relies on his estimate that the placements business can see revenues grow 11% per year as volumes and pricing improve.
IDP Education
- Moat rating: Narrow
- Fair Value estime: $22 per share
- Uncertainty rating: High
- Star Rating: Five stars
A bonus question from your author
This article focused on the main topic of concern for markets right now – the outlook for IDP’s student placement business. But what about the other big contributor: it’s language testing segment? I had a question of my own for Shane regarding potential competition in this space.
More specifically, I had a question about a little green owl. Could Duolingo’s offshoot language testing business, which seems to be growing like a weed, impact the value of IDP’s core IELTS language testing asset?
In short, Shane doesn’t appear to be too concerned at the moment. While he recognises the immense growth and success of the Duolingo English Test’s low-price offering, this business is overwhelmingly skewed to the US market.
With just 10% of IELTS volumes coming from the US, this is very much a secondary playing field for IDP’s language testing business. In its core market of academic institutions in Commonwealth countries, IELTS remains by far the preferred option and Duolingo hasn’t gained as much ground.
In saying that, Ponraj does note increased competition within the language testing segment within the last decade, a timeframe in which most academic institutions have moved away from only accepting IELTS as a proof of English proficiency.
Nonetheless, Ponraj still sees the IELTS test as enjoying a strong advantage over most other tests. With over 11,000 schools, employers and migration authorities accepting IELTS globally, students are drawn to this test due to its wide acceptance. Meanwhile, this large and growing pool of IELTS certified students and visa applicants makes it more attractive for institutions to accept, and so on.
This network effect underpins Ponraj’s Narrow Moat rating for IDP Education as a whole. While the placements segment seems well placed for reasons that we discussed earlier, Shane stops short of assigning it a stand-alone moat. It is essentially a commodity supplier of volume to universities, and several other players have similarly large networks of students and universities.
Previously on Ask the analyst:
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