Shares in international student placement and language testing firm IDP Education [ASX:IEL] tumbled as much as 12% in early trading today.
The drop came after the company finally quantified the impact of tightening immigration policies on its business.
Its shares have been broadly trending down since February 2023, with shares currently at $14.89 per share, down -35.5% for the past 12-months.
But it looks like the stock could fall further, as Investors sell heavily today during a broadly positive day on the benchmark.
Source: TradingView
IDP Falls with Immigration Numbers
IDP revealed in a trading update today that restrictions on international student numbers, including hard caps, caused visa applications to decline between 20% and 30% in the March quarter.
The changes brought in by the Australian, Canadian and UK governments have cut immigration numbers, especially for student visas.
This has helped alleviate strained rental markets in many major cities here and abroad, but it has come at a cost to many companies like IDP.
The $4 billion company now expects its total addressable market to shrink by 20-25% over the next 12 months.
As a consequence, IDP adjusted its FY24 EBIT to be ‘broadly-in line with FY23’.
This is corporate-speak for no growth, well below market expectations of around 10%+ this year.
The company did not provide firm FY25 guidance but flagged that it anticipates declines in both student placement volumes and English language testing.
In response, IDP says it is implementing a cost-reduction program, although the details were light.
The company employs some 6,800 people in more than 30 countries, so it will likely reduce its workforce in the affected countries.
The news is a major victory for short-sellers, who have increasingly targeted IDP.
The percentage of IDP shares sold short has jumped from around 10% in March to 17.5% currently, making it the second most shorted stock on the ASX.
IDP’s CEO Tennealle O’Shannessy put on a brave face, arguing that while the nature of immigration restrictions across IDP’s major markets is unprecedented, the company has weathered similar ‘mini-cycles’ before.
She characterised the current headwinds as ‘short term and cyclical, driven by election cycles.’
How true is that, and is now an opportunity for investors?
Outlook for IDP
There is some truth to this view: these immigration policies tend to go in cycles.
The UK is in the midst of an election campaign, while Canada and Australia face elections next year.
The leaders of the latter two countries have faced immense pressure to curb immigration-fuelled living cost increases, strain on public services, and most critically, housing unaffordability.
Bulls argue that education exports are too crucial to these economies to be constrained for long, especially as populations age.
They also believe IDP can take market share in a dislocated market, with O’Shannessy claiming early evidence that IDP is outperforming the broader market.
As such, IDP plans to keep investing for an ‘inevitable recovery,’ with O’Shannessy drawing parallels to the post-COVID rebound.
In the investor call today she said:
‘We are managing this business for long-term shareholder value creation, and therefore are mindful that we need to continue to invest for the inevitable recovery and to not cut into the strategic muscle of the firm.’
There are many good points here; however, from the perspective of shareholders, this recovery might take longer than they have patience for.
If we take Australia as an example (as it was one of the three major countries named in the visa restrictions) we can flesh out the underlying problems here.
One of the key drivers of political pressure restricting immigration is the cost of living.
As much as Western Nations need immigration to function, recent rapid intakes of immigrants and other inflation have pushed food and rental prices to extremes.
A good proxy for all these costs is housing affordability.
If we look at the top 10 least affordable major cities in the world, we have:
Source: Statistica
At least in Australia, the housing affordability crisis has been building for a decade and — given the sluggish new supply — may take another decade to resolve.
From what I understand, a similar story could be said about Canada’s housing market.
If that’s the case, immigration caps could prove stickier than IDP expects.
Much of this depends on how quickly and aggressively policymakers tackle structural housing shortages.
But even then, looking at the weak construction industry in the wake of higher interest rates, these policies may not be enough.
For now, IDP believers will need to stay patient, and trust management can navigate near-term.
But if housing woes keep immigration tight, the short-sellers may not need to cover anytime soon.
Thankfully, the pressure on our cost-of-living has seen some relief from the current low prices of oil.
These low oil prices seem to be based on shorter-term trends in demand; but bigger supply trend could be just around the corner.
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Regards,
Charlie Ormond
For Fat Tail Daily
