EUR 69.62 For Business Accounts Only

Initiate with Overweight; Growth, despite forthcoming supply

There is still room for growth. Humansoft (HS) is Kuwait’s leading private university operator, with 48% market share. New capacity, as of 2018/19 (c18k students vs. 13k), after reaching c90% utilisation in 2017, along with the introduction of 4 new majors, drives a 2018-20e EPS CAGR of 13% (incl. 10% corporate tax, as of 2019). Valuation is undemanding (2018e P/E of 15.9x vs. 18.0x for peers), while HS offers a 4.4% dividend yield. We believe our forecasts fairly reflect new dynamics: lower enrolment rates (2019-22 of -6% vs. 16% historically), due to new supply from Kuwait University, prudent tuition price hikes, and staff cost inflation. During 2017, HS’s founder and Chairman reduced his stake to 37% from 60%; a further 7% may be up for sale (USD116mn at market price), which could help unlock value by boosting liquidity.

Margin levels sustainable. Tuition price revisions are due for AUM (2019) and ACM (2020), but our assumption is 50% below management’s target (given heightened competition), and in line with recently implemented revisions by 3 other private players. HS enjoys superior margins; 53% EBITDA and 45% NPM, despite the variable nature of teacher salaries (47% of cash costs). The remaining cash costs are mostly fixed (non-teaching staff can accommodate c15% higher students), supporting continuity of above-average margin levels.

We downplay the risk of scholarship changes. 57% of students enrolled in the government’s scholarship programme choose HS, comprising 91% of its student base. We downplay the risk that any changes to this programme would affect HS because: i) Kuwait’s education spending comprises 9.5% of fiscal spending (GCC average = 16.5%), ii) ratifying the decision would be politically challenging (and, even if passed by Parliament, overseas scholarships are likely to be rationalised – similar to Saudi – before affecting domestic scholarships), and iii) AUM is currently 80% cheaper for the government vs. Kuwait University.