NVT - Navitas Limited

[robusta]

Re: NVT - Navitas

Just listened to todays investor webcast.
http://www.media-server.com/m/p/3jxy3ozh

Cant see anything to be nervous about, investment in future growth is going ahead and earnings are being diversified across regions and divisions.
Looks like once again I'm in full agreement with the above post by craft. Share price fell today, they are running out of franking credits, yawn off to sleep.

 

[Ves]

Re: NVT - Navitas

It's extraordinary to think that they now spend circa $130m (and sharply increasing in-line with revenue) each year on what is classified as marketing expenses.

Now, I don't know exactly what that spend entails, but it's clear that there is probably no competitor in the world that can afford to spend such a substantial amount on their network. The big spend on the agency network, relationships with universities (both potential and current partners), and getting the name out across the globe as their expansion continues to build steam, probably caps profits in the short-and-medium term, but it will help protect the franchise and maximise returns in the very long term. I love it when companies with strong competitive positions flex their muscles.

Put it this way, looking at the accounts, if they decided for whatever reason that they did not want to grow, and that they were happy with the current scale, profit would look a lot higher in the short term.

I've learnt a lot about this business since the Macquarie University "saga."

 

[VSntchr]

Re: NVT - Navitas

It's extraordinary to think that they now spend circa $130m (and sharply increasing in-line with revenue) each year on what is classified as marketing expenses.


Put it this way, looking at the accounts, if they decided for whatever reason that they did not want to grow, and that they were happy with the current scale, profit would look a lot higher in the short term.

That's a very solid point. If you back out say $65m of that spend (conservatively assuming that some is required for stay-in-business purposes and it is not all for growth), the operating margins go well into the 20% range. Makes for some interesting decisions for the DCF inputs in the later years when growth tapers down...

 

[skc]

Re: NVT - Navitas

That's a very solid point. If you back out say $65m of that spend (conservatively assuming that some is required for stay-in-business purposes and it is not all for growth), the operating margins go well into the 20% range. Makes for some interesting decisions for the DCF inputs in the later years when growth tapers down...

Hmm... I don't know how you can determine what portion of market expense is "business as usual" vs "growth".

My guess is that the vast majority is in the "business as usual" category. This is because their end customers are transient - students who enrol in a course and stay however long they stay to complete their study. Every semester you need to re-spend all the money to attract the new group of (potential) students. I think this is indicated by the fact that marketing expense has been growing perfectly inline with revenue over the last 5 years.

Incidentally... NVT's top line growth has been consistent. But EPS growth has been pretty flat since 2010, and funny how the share price (after the recent slump) reflects that. This obviously doesn't take into account the dividends that have been paid out.

 

[DeepState]

Re: NVT - Navitas

Hmm... I don't know how you can determine what portion of market expense is "business as usual" vs "growth".

My guess is that the vast majority is in the "business as usual" category. This is because their end customers are transient - students who enrol in a course and stay however long they stay to complete their study. Every semester you need to re-spend all the money to attract the new group of (potential) students. I think this is indicated by the fact that marketing expense has been growing perfectly inline with revenue over the last 5 years.

Incidentally... NVT's top line growth has been consistent. But EPS growth has been pretty flat since 2010, and funny how the share price (after the recent slump) reflects that. This obviously doesn't take into account the dividends that have been paid out.

View attachment 58837

One way to think of this might be to regard the marketing expense as capex with some sort of rapid depreciation schedule. The expense is not purely CODB as it contributes the brand value of NVT which requires maintenance.

The situation has the makings of strong network effects resulting in an effective monopoly. Sort of like a Google or Facebook or Microsoft in the early days. They ship. People use them and as more people use them, more people have to use them and it is harder to leave. If you are going for that and have not yet reached the inflection point, expenditure on capex (even if it is recorded as expense according to accounting standards) is pretty smart. This firm is hitting high RoE and return on marginal capex (which is roughly the increase in EBIT before marketing less amortisation) looks well above cost of capital. This thing has the power to grow profits via internal generation and has reasonable control over it if the franchise holds. Quite nice, actually. Valuation concerns are to the side. My view is that the reported EPS understates the true EPS if the accounts were re-stated. I do not know enough of the franchise to know if the RoE can hold without shenanigans.

I wonder though, with the move to fully user pays style tertiary education, whether the top rated universities will become better funded and thus compete more directly for students. There may even be a sense of premier league not to be challenged through a firm like NVT. Does Harvard go through intermediaries?

 

[Ves]

Re: NVT - Navitas

Put it this way, looking at the accounts, if they decided for whatever reason that they did not want to grow, and that they were happy with the current scale, profit would look a lot higher in the short term.

Probably should have qualified this or at least written my post more clearly - companies with light asset bases often have "growth costs" hidden in the P&L statement - for NVT it is not just marketing (although my focus in the previous post was on how their ability to fund massive marketing expenses gives them a competitive edge), but it is extra academic staff, and additional administration costs, that are carried in the form of lower margins until the new colleges reach their optimum scale. There is a presentation slide that shows the forecast EBITDA of a college vs. its student numbers (note: my calculations suggest that this does not include marketing).

I'm definitely not saying that there is some huge amount like $65m, but the numbers are pretty conservative IMO, and there's probably $10-15m EBITDA in funding growth of the newer schools that have not matured (alternatively you may argue that there is no guarantee of them reaching scale). You will note that they do disclose the EBITDA loss on the colleges opened in the current financial year in every investor presentation, however this will not include colleges that were opened in prior years that are barely above break even etc. It can take 3-4 years for some of these colleges to attract the initial 1,000 student inflow a year and start producing a steady profit (there was something on this in the 2009 presentations if I recall). Any student growth past that point is very high margin, indeed.

I don't make these adjustments when doing a DCF, but they do help in seeing where future potential growth lies.

 

[skc]

Re: NVT - Navitas

You will note that they do disclose the EBITDA loss on the colleges opened in the current financial year in every investor presentation, however this will not include colleges that were opened in prior years that are barely above break even etc. It can take 3-4 years for some of these colleges to attract the initial 1,000 student inflow a year and start producing a steady profit (there was something on this in the 2009 presentations if I recall). Any student growth past that point is very high margin, indeed.

I don't make these adjustments when doing a DCF, but they do help in seeing where future potential growth lies.

Very good insight. Yes if they stop opening new colleges they will reduce those initial bleeding years and increase their EBITDA by some amount. At the same time, if they DO stop opening new colleges their share price multiple will get totally whacked. Hopefully by that stage (where they stop opening new colleges) the cashflow stream will be so large that it has paid for your investment return many times.

This thing has the power to grow profits via internal generation and has reasonable control over it if the franchise holds. Quite nice, actually. Valuation concerns are to the side. My view is that the reported EPS understates the true EPS if the accounts were re-stated.

Yes a very powerful model and a substantial market to grow into.

I wonder though, with the move to fully user pays style tertiary education, whether the top rated universities will become better funded and thus compete more directly for students. There may even be a sense of premier league not to be challenged through a firm like NVT. Does Harvard go through intermediaries?

Does Harvard need an intermediaries? Surely there are many more applicants than there are places..... we are talking about Harvard! On the other hand, NVT has a Cambridge college...the town, not the university attended by Sir Issac Newton and others). So I'd say Harvard is never the target partner for NVT. It's like me trying to date [Insert your own favourite actress/model].

FWIW, I took a position @ $4.75. The market was kind enough to offer another opportunity to buy a great quality company at a reasonable price.

 

[craft]

Re: NVT - Navitas

FWIW, I took a position @ $4.75. The market was kind enough to offer another opportunity to buy a great quality company at a reasonable price.

Welcome aboard

I hope a man with your outstanding work ethic can find within themselves the laziness required to handle NVT.

 

[skc]

Re: NVT - Navitas

Welcome aboard

I hope a man with your outstanding work ethic can find within themselves the laziness required to handle NVT.

Haha Craft... You read me well.

That is indeed the most important thing I need to work on as I start pretending to be an investor.

I am used to wathcing 4 screen, 18 market depths and every tick on my positions. I keep my mouse pointer on the buy/sell button and drink my coffee with my left hand. It's my natural reaction to act quickly and you need to do that in the trading game.

But with my investments, I deliberately opened a brokerage account with Westpac... To execute an order with them I need to log in, find the trading page, find the stock, enter the details and hit submit... and hit confirm again! It takes 100 times longer and I need to pay about 10x more brokerage than I pay for trading. Hopefully that should slow me down and help me to not over-react.

 

[Ves]

Re: NVT - Navitas

Computershare registry question. I was having a look at the NVT DRP before and there are no terms and conditions online that are linked to the registry (there are however some on the NVT site). So apparently that means that you cannot register online through Computershare.

I can't seem to locate the DRP election paper form that I may or may not have been sent by the company. Any idea how to get a replacement copy? Preferable if I didn't have to go through those horrible computer automated telephone prompts that Computershare uses....

 

[craft]

Re: NVT - Navitas

Computershare registry question. I was having a look at the NVT DRP before and there are no terms and conditions online that are linked to the registry (there are however some on the NVT site). So apparently that means that you cannot register online through Computershare.

I can't seem to locate the DRP election paper form that I may or may not have been sent by the company. Any idea how to get a replacement copy? Preferable if I didn't have to go through those horrible computer automated telephone prompts that Computershare uses....

Hi V

Just checked computershare and got the same "no terms and conditions available - please contact" message. NVT has only recently introduced a DRP and the original Documents were dated 7th Feb 2014 if that helps you track down the hard copy that was sent.

Otherwise you're probably going to have to talk to the computer..... press 1 to be run around in circles..2 to be cut off. 3........

 

[Ves]

Re: NVT - Navitas

Otherwise you're probably going to have to talk to the computer..... press 1 to be run around in circles..2 to be cut off. 3........

Thanks for the encouragement, I guess if I ring now I might be done before 5pm....

 

[Ves]

Re: NVT - Navitas

Thanks for the encouragement, I guess if I ring now I might be done before 5pm....

I eventually got through to a friendly young chap with quite a well imitated Australian accent. He said they will email me a new form within 24 hours. Relatively pain free!

craft, I asked you a query about NVT and similar companies in the PVoFC thread, hope it wasn't too intrusive on the SWAG secrets.

 

[Faramir]

Re: NVT - Navitas

Recently received my dividend from NVT. It's small because I brought so few shares the day after everyone else grabed an absolute bargain. Only six of of eight shares I brought have dividends. Maybe when I get the rest of my dividends, might buy more of NVT? Feel happy that I managed to pick at least one very good company (at nearly the right time - only one day too late).

 

[Muschu]

Re: NVT - Navitas

Recently received my dividend from NVT. It's small because I brought so few shares the day after everyone else grabed an absolute bargain. Only six of of eight shares I brought have dividends. Maybe when I get the rest of my dividends, might buy more of NVT? Feel happy that I managed to pick at least one very good company (at nearly the right time - only one day too late).

I was holding this stock before its recent decline. It's one of very few that I would continue to hold [as I do] under such circumstances. International long term growth involvements continue to grow.

 

[hiddencow]

Re: NVT - Navitas

I notice there's a lot of interest and faith in the prospects of this company, especially from respected value investors here on the forum.

Could someone provide a little insight into why they think it makes a good investment at these prices. At an initial glance it's trading on a P/E of 22 and has not grown EPS for the last 5 years. What is going to change in the near future?

 

[VSntchr]

Re: NVT - Navitas

I notice there's a lot of interest and faith in the prospects of this company, especially from respected value investors here on the forum.

Could someone provide a little insight into why they think it makes a good investment at these prices. At an initial glance it's trading on a P/E of 22 and has not grown EPS for the last 5 years. What is going to change in the near future?

A very desirable business model that enables them to receive tuition payments in advance and subsequently pay expenses such as staff and marketing expenses periodically throughout the period. This enables the company to grow and expand without needing to ask shareholders or the bank for funds. Look at the working capital to see how they manage this.

There has been a tough period for NVT with student numbers down since the GFC presumably for a variety of reasons. However this has been recovering and numbers are now hitting new highs. I expect earnings to grow proportionately quicker than revenue as growing student numbers allow NVT to achieve critical scale in their currently smaller markets.
It is very hard to get to where NVT is in terms of brand name and global network to source students..hence the competitive position is evident.

Some cons which have been discussed already include the potential of universities to replicate NVT and source their own students - this risk has materialised with one university and will have to be evaluated as a subjective opinion until we can see how Macquarie goes on their own - or if other uni's start to follow this path.

 

[hiddencow]

Re: NVT - Navitas

My experience from talking to international students is that they have very little knowledge about universities and will take the advice of the agent. The only decision is which country to go to and even then they will take the advice of the agent as to which country would be easiest/cheapest to suit their needs.

Still, I don't see a compelling investment case here. It looks to have performed very well through the GFC growing earnings substantially and has continued to grow revenues since but without any profit growth. Is this because of increased investment? More scale should have translated to a greater profit margin but it has not so far.

At this price a fair bit of growth is already priced in. If it is already the dominant player in the market then it will rely on overall market growth to increase revenues and profits. I see this being dependent on government Visa policies and exchange rates effecting Australia's attraction for international students.

I am fairly new to investing though and have never really been interested in stocks which are loved by the market.

 

[VSntchr]

Re: NVT - Navitas

Still, I don't see a compelling investment case here. It looks to have performed very well through the GFC growing earnings substantially and has continued to grow revenues since but without any profit growth. Is this because of increased investment? More scale should have translated to a greater profit margin but it has not so far.

The profit margins have been held down as they are expanding into the US and other markets where they are yet to form the scale that Australia has.

As for no profit growth, are we looking at the same numbers!?

EBIT from 2008-2014
54.43 70.39 89.09 98.68 111.72 113.65 119.59

If your looking at the NPAT line, keep in mind this year had a ~$30m impairment after the loss of Macq. Uni.

 

[hiddencow]

Re: NVT - Navitas

I was looking at the EPS line

19.40 19.49 19.87 21.85

Only starting to see growth this year but as you mentioned there was the $30m impairment.