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Top broker says buy this mid-cap stock ahead of its short-term bounce

The share price of IDP Education Ltd (ASX: IEL) could be poised to rally to a fresh record high even after it staged a 25% rally since the start of this calendar year, if Morgan Stanley is to be believed.

The stock has been consolidating around the $5 mark for the past month and the broker thinks there is an 80% chance the international student placement services company will outperform the market in the next 60 days and run up towards its price target of $5.75.

Jump on for the ride! One of the key drivers for the bullish call is the broker’s belief that the strong structural industry tailwinds are sustainable given China’s ongoing transition to a high-income economy and Australia’s position to support this transition.

The company is stepping up its China operations through an agreement to buy 20% of HCP Limited, a Chinese company specialising in delivering English language test preparation materials via social media and a mobile app.

We will see an increase in the computerisation of such tests with the Australian government aiming to deliver a computer-based International English Language Testing System (IELTS) by the end of this calendar year. This could prove to be an inflection point for the stock, according to Morgan Stanley.

In spite of the tighter immigration control implemented by our government and the scrapping of the 457 visas, the broker sees limited impact to IDP Education’s bottom line. In fact, Morgan Stanley believes our government is promoting study as the preferred path to immigration.

These factors, including potential market share gains, should continue to support the company’s above-industry earnings growth.

“We see defensive earnings, unexposed to the domestic Australian economy and leveraged to a projected lower Australian dollar,” said Morgan Stanley.

“We believe the stock will trade towards our price target of $5.75, which implies that it holds its multiple and grows into its valuation.”

The lower Australian dollar is a big driver for international student growth as it will make our higher-educational institutions more cost competitive compared to those in other key western markets like the US and UK.

The performance of IDP Education stands in contrast to education provider Navitas Limited (ASX: NVT), which has slipped 13% into the red over the past year.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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