EUR 850.00 For Business Accounts Only

Morningstar | New Broom Cleaning Up Navitas, but SAE U.S. Closure No Disaster

We have maintained our fair value estimate for Navitas at AUD 4.65 per share following management’s decision to either sell or close the SAE colleges in the United States. However, at the current market price of around AUD 4.10, the market appears to have overreacted to the announcement and the shares look undervalued. Although we’ve cut our EBITDA forecast by around 4% on average over the next five years, the impact on our fair value isn’t sufficiently material to justify changing our fair value estimate. Based on our revised forecasts, the shares trade on a fiscal 2019 price/earnings ratio of around 18 and a dividend yield of 4.6%, or 6.6% including franking credits, assuming a payout ratio of 82%. Aside from the SAE U.S. business, we remain confident that the company can generate long-term revenue growth of around 5% per year, underpinned by growing demand for Western tertiary education from Asia-based students.

The U.S. SAE colleges generated AUD 60 million in revenue in fiscal 2018, around 7% of group revenue, and an EBITDA loss of AUD 3 million, versus our AUD 147 million forecast for group EBITDA excluding impairments. The sale or closure of the SAE U.S. business should therefore boost group profitability in the long term, but the short-term impact is more uncertain. For example, if the SAE U.S. colleges cannot be sold, the company will likely incur increasing losses as student numbers wind down and may incur redundancy costs and lease-break fees in the 10s of millions of dollars.

Management has stated that AUD 130 million in one-off costs will be incurred in fiscal 2018 relating to a range of things, including an impairment of goodwill associated with the SAE U.S. colleges of AUD 30 million, and an AUD 10 million write-down of U.S. deferred tax assets, both of which are noncash. We expect the remaining AUD 90 million in one-off costs will be largely noncash in the short term, as it relates to property, plant, and equipment write-downs, provisions for onerous leases and student debtors, and staff redundancies. However, we have assumed the company will both close and sell colleges and that AUD 40 million in one-off provisions will ultimately become cash costs. We’ve also assumed college sales will generate cash proceeds of AUD 20 million.

Over the next two years, we’ve assumed that the SAE division’s EBITDA margin, which includes the U.S. and non-U.S. colleges, improves from 15% in fiscal 2018 to 20% in fiscal 2020 as the loss-making U.S. colleges are closed or sold. However, our EBITDA forecast, which comprises around 17% of group EBITDA, is roughly flat for the next two years as we assume margin expansion is offset by lower revenue. We expect the change in strategy with regard to the SAE U.S. business is a result of the recent appointment of David Buckingham as CEO and Philip Mirams as CFO, who we believe have made the right decision. Navitas will provide more information regarding the SAE U.S. business and the broader group at its full-year result on Aug. 7.