Shares in IDP Education Ltd (ASX: IEL) were getting hammered on Friday morning after Macquarie downgraded the company to an underperform rating.
IDP Education shares fell well below Macquarie's own price target of $2.35, dropping 20.3% on heavier than usual volume to be changing hands for $2.12, after hitting a new 12-month low of $2.08. The shares have traded as high as $7.97 during the past 12 months.
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Difficulties lie ahead
Macquarie said there were numerous headwinds for the company including a stronger Australian dollar, weaker visa volumes across Australia, the UK, and Canada, and soft demand signals for English education as evidenced by lower Google searches for the IELTS test across India and China.
IELTS is the dominant test used to evaluate English proficiency.
Macquarie added:
While the China IELTS rollout is progressing well, with test centres rising to 13 across 9 provinces, this is insufficient to offset broader weakness. Further, while we expect IEL could announce additional cost-out in response to topline pressures, we estimate IEL would be required to achieve additional $25m net cost reduction on top of the $25m already announced for FY26E to reach Consensus FY27 EBIT. We view this as challenging given lower-hanging cost-out opportunities (e.g., project spend) have already been captured.
Macquarie said there was a risk of further downside in FY26 and downgrades to the outlook for FY27.
They added:
While our FY26 EBIT of $120.0m is at the bottom-end of FY26 guidance of $120-130m, we see downside risk here due to foreign exchange headwinds and given our volume estimates are more optimistic than current indicators imply. We see significant downside risk to FY27.
The Macquarie price target was cut by more than half, down from $5.45 previously to $2.35.
They added:
While we view IEL's long-term thesis to be intact, as both foreign student demand should return, and policy setting should improve given university and population growth reliance on students, we see near-term earnings headwinds.
Company outlook positive
IDP has not made any comment regarding its business outlook since the release of its first-half results in February, when it upgraded its full-year guidance from EBIT of $115 to $125 million to $120 to $130 million.
Managing Director Tennealle O'Shannessy said at the time the company was pleased with the first-half performance, "with the team executing well across the business whilst also progressing our transformation program at pace''.
IDP Education is valued at $740.4 million.
