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3 reasons to consider buying Idp Education Ltd shares this week

In the share market the mid-cap space can offer growth investors some of the best returns as it doesn’t always carry some of the high risk of the small cap space where many companies don’t even generate profits, but does offer room for bigger returns than the established but slow-growing blue chip or large cap space.

One mid-cap business performing very well since it listed in November 2015 is Idp Education Ltd (ASX: IEL). It’s a for profit education business similar to the likes of Navitas Limited (ASX: NVT) or 3p Learning Ltd (ASX: 3PL), but actually has a far superior track record.

In fact since it listed at $2.65 per share in November 2015 it has climbed to $9.15 per share today to climb more than 210% in just 3 years. It now has a market value around $2.33 billion so let’s look at some reasons behind its success.

Tailwinds – IDP’s core business is the provision of English language proficiency (IELTS) testing services that students mainly take in order to enter higher education courses in English speaking countries, to gain visas, or to impress prospective employers. English’s accelerating dominance as the global language of business is seeing demand for the tests soar, with growth up 25% over FY 2018. IDP receives each time a student takes the test, with many students failing multiple times before passing to create even more fees for IDP.

The company also has a student placement business that helps send overseas students into higher education in English-speaking countries. This business grew revenues 19% to $122.7 million in FY 2018.

IDP is also leveraged to the growth in emerging market economies with a lot of its fee-paying students coming from high growth markets like India, China, Brazil and Mexico.

Growth – the rising demand helped the company increase its net profit before amortisation 25% in FY 2018, with the final dividend also up 18% to 6.5 cents per share. IDP is also investing in technology such as more computer-based testing for its IELTS tests in order to save on cost and administration processes.

Foolish takeaway

One obvious downside to the stock is its high valuation on 41.4x trailing earnings per share of 22.1 cents. As at June 30, 2018 the group also had total debt of $63.9 million, but net debt of just $15 million after accounting for cash on hand.

Therefore while the business has a good track record and the tailwind of strong long-term demand the high valuation is likely to put off a lot of value investors.

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Motley Fool contributor Yulia Mosaleva has no position in any of the 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 Scott Phillips.

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