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Is the IDP Education Ltd share price a buy?

The IDP Education Ltd (ASX: IEL) share price is up 3.2% to a record high of $14.38 this morning after the ‘for profit’ education group reported a record result last week.

For the six-months ending December 31 2018 IDP posted a profit of $40.7 million on revenue of $304.3 million, with the profit and revenue up 31% and 23% respectively.

These are some impressive numbers and it’s no surprise the IPD share price has soared as its core English language or IELTS testing business continues to be a big growth driver.

IELTS testing is conducted by IDP examiners for students seeking to get benchmark English language proficiency ‘scores’ in order to obtain a visa, job, or higher education course place for example. IETLs scores may also be sought as a general qualification to boost a holder’s job or career prospects for example.

For the six-months ending December 31 2019 IELTS testing revenue grew 20% to $178.6 million, with volume growth up 18%. As we can see IELTS testing is a central part of IDP’s business model making up more than half its revenue and likely more that that in profit.

I’ve been critical of its business model and disclosure in the past as IELTS testing has largely been done on a “pen and paper” and “face-to-face” speaking exam basis, although some of the testing has moved a more computer-based format recently.

Examiners ‘score’ students on the basis of their assessment of performance, with the speaking part of “computer-based” testing for example still done on a face-t0-face basis in a private room.

As a for profit business IDP’s top line benefits every time a student fails and resits the IELTS test (currently costs $271 per test according to latest report), although IDP does not disclose how many times on average a student resits a test.

For example over the half-year period  660,000 tests were conducted and it would be a valuable insight for investors to know what percentage of that was resits.

It’s not unusual for a student to attempt two or three test before gaining a sufficient IELTs test score, while some students will try more times before achieving a sufficient proficiency score. This is because many students have little choice but to achieve a certain score if they want to obtain a university placement, visa, etc.

In a way then IDP (and its higher education owners and shareholders) benefits in terms of top-line growth the more students are awarded insufficient scores.

As such it’s not a business model I’m keen on, but that’s not to say the stock can’t go higher, as IDP is a virtual monopoly as a co-owner of the IELTs testing alongside higher education players aligned in chasing profits from students.

Notably, IDP’s approved IELTS provider status means students have little choice but to use it for certain required outcomes.

For the half year IDP earned basic earnings per share of 16.1 cents or 32.2 cents on an annualised basis that means it trades on 45x annualised earnings, with a 1.3% trailing yield.

Due it its business model, expansive valuation, and lack of disclosure this is not a stock I’d rate investment grade.

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