Global education provider Navitas (ASX: NVT) has just released its results for the full year. It has been a sound performer for a number of years and the latest results appear to still be sound, although shareholders and potential investors could have reason to be wary.
Navitas was founded in the early 1990s by Rod Jones and Peter Larsen, beginning with a single partnership with Edith Cowan University in Perth. Today the firm can boast of programs with 111 colleges and schools, around 5,500 staff and over 80,000 students spanning the globe. Peter Larsen still sits on the board and Rod Jones is still the Chief Executive Officer, positions they have held since the company listed in 2004.
The results release showed that revenues grew 6.3% in financial year 2013 to $731.7 million, net profit after tax (NPAT) grew 1.9% to $74.5 million and earnings per share (EPS) was also up 1.9% to 19.9 cents per share (cps). A final fully franked dividend of 10.2 cents was declared, bringing the total value of dividend paid for the full year to 19.5 cents per share.
A classic example of earnings multiple expansion
Much has been said in the past year about the share market rally being driven by earnings multiple expansion rather than earnings growth. Navitas' share price would look to be a classic case of multiple expansion rather than the result of earnings growth.
In the past five years Navitas' share price has increased by 180%. Over the same time period the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up just 4%. Its fabulous share price performance doesn't appear to be matched by the revenue and earnings performance of the company. The full-year results for 2008 were: revenue $345 million, NPAT $37.4 million and EPS 10.8 cps. Comparing these 2008 results with the 2013 results show that both NPAT and EPS are up less than 100% yet the share price has gained 180%.
It's interesting to consider that in August 2011 the market was valuing Navitas at $3.50 per share (although it had spent most of the previous 12 months closer to $4). In August 2012, the share price was again hovering around the $4 level, however since November 2012, the share price has been on a stellar run rocketing from $4 to $6. Over this 2011 to 2013 time period though, EPS have actually declined. That's multiple expansion for you!
Beware of the McMillan Shakespeare effect
There has been much coverage of the potential change in legislation around the Fringe Benefits Tax (FBT) in recent days and the effect this could have on industry participants, including McMillan Shakespeare (ASX: MMS). Investors now have a much clearer understanding of just how exposed a company like McMillan Shakespeare is to the whims of politicians.
Navitas, given its role within the education sector, also finds itself exposed to government policy and those same whimsical politicians. Companies exposed to the risk of regulatory uncertainties deserve to trade at a discount rather than a premium and just as McMillan Shakespeare investors are now asking themselves that very question, so perhaps should Navitas investors.
Foolish takeaway
The results appear to have been what the market was expecting, with the share price hardly budging after the results release.
At $6, Navitas is trading on a dividend yield of 3.25% and a hefty price-to-earnings ratio of 30 times. Of note, the board choose to pay out 98% of earnings as dividends, although a payout ratio future aim of 80% has been declared. With a balance sheet full of intangibles and net debt of $95 million, it is perhaps telling that the company has adopted a dividend reinvestment plan.
2013 now marks the third year of stagnating earnings growth for Navitas. Management is promising "solid growth in FY14" and given the premium pricing of the stock, shareholders will be hoping management delivers. Should a fourth year of flat earnings occur, it is hard to see why the market would continue to place a PE multiple of 30 on the stock.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
