Top broker tips one of the ASX 200's worst performers of the past year to surge 50%

A broker is excited by the potential of this stock.

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The S&P/ASX 200 Index (ASX: XJO) stock IDP Education Ltd (ASX: IEL) has suffered significantly over the past year, dropping by 40%, as we can see in the chart below. Despite this significant fall, UBS thinks the education and language testing business can recover and deliver a 50% share price rise.

Of course, just because a share price is predicted to rise a large amount doesn't mean it's guaranteed to happen.

In this article, I'll look at why UBS sees an opportunity with the IDP Education share price and how much it thinks profit can grow.

Potential headwinds

UBS acknowledged that changes in government policies in Canada — such as a tightening of spousal visas — created uncertainty for the education provider in FY24 and FY25.

We have previously covered some of the other issues in Canada, which the ECP Growth Companies Fund investment team explaining as follows:

IDP Education underperformed as the Canadian government opened up its SDS immigration visa requirements to 4 new English language tests, increasing competition for IDP's IELTS [International English Language Testing System] business.

It is uncertain how much market share IELTS could lose over the next few years, however market estimates point to an 8% to 15% EPS impact.

UBS also pointed to UK news that suggests a "potential tightening of study work rights."

In Australia, we've just heard that international student fees are going to increase, according to reporting by the Australian Financial Review. This comes after new measures were announced to stop non-genuine students.

UBS said these countries were "targeting the problem of non-genuine students". However, the broker thinks IDP's competitors are more exposed to these changes, which could result in some offsetting market share benefits for IDP, or potential "consolidation".

The broker noted that the UK could implement further changes, though there has already been a tightening of restrictions on students' ability to bring in independents.

Any tightening announcement should be the "last major piece of negative regulatory news", though any US changes could "impact the growth angle".

Despite these headwinds, UBS thinks the ASX 200 stock may generate net profit after tax (NPAT) of $162 million in FY24, $179 million in FY25 and $226 million in FY26.

Ongoing profit growth?

The broker has forecasted that the IDP Education net profit could continue to grow in FY27, with NPAT of $271 million, and then reach $312 million in FY28.

Based on UBS' profit estimates, the IDP Education share price is valued at 28x FY24's estimated earnings, 26x FY25's estimated earnings, 20x FY26's estimated earnings, 17x FY27's estimated earnings and 15x FY28's estimated earnings.

Despite the challenges IDP Education is facing, it's pleasing to see the business predicted to see steadily growing profit, which is usually a very supportive driver of pushing the share price higher.

According to the projections, the dividend could also increase each year between FY24 and FY28, but I'm not going to focus on that because the IDP Education share price performance could be the key factor in total shareholder returns.

IDP Education share price target

UBS currently has a share price target of $25.30 on the company. A price target tells us where the broker thinks the share price will be in 12 months.

At the current IDP Education share price, the price target implies it could rise 54%. That would be a big return – even half that would probably outperform the ASX share market quite nicely.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Idp Education. The Motley Fool Australia has recommended Idp Education. 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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