IDP Education: A $100 million payday for short sellers

IDP Education (ASX: IEL) issued a sharp earnings downgrade on Tuesday, which almost halved its share price from $7.47 to $4.02, wiping out approximately $1 billion from its market capitalisation.

Short sellers have aggressively targeted the international student placement provider, with short interest soaring from 5% in January 2023 to a peak of 17% by May 2024, before settling around 11%.

Source: Shortman

These bearish bets paid off handsomely, as the stock has spiraled 80% lower since February 2023, driven by regulatory and operational challenges. With short interest at 11% before the downgrade, short sellers likely pocketed around $100 million from the selloff.

A Dire Earnings Outlook

IDP’s updated FY25 guidance forecasts a 28-30% decline in student placement volumes and an 18-20% drop in language testing volumes, resulting in an EBIT range of $115-125 million. For context, Goldman Sachs had projected FY25 EBIT at $161.8 million (as of May 9), meaning IDP’s midpoint guidance is 25% below expectations.

The company cited multiple challenges across key markets:

• United Kingdom: Uncertainty following the Immigration Policy White Paper, with further restrictions on student immigration looming.

• Australia and Canada: Restrictive post-election policies and pending changes continue to dampen demand.

• Canada: Sharp declines in student demand due to ongoing policy volatility.

• United States: A growing anti-international student sentiment is impacting the market.

These issues compound existing pressures:

• Canada’s IELTS Monopoly Loss: In May 2023, Canada’s Immigration, Refugees and Citizenship Canada (IRCC) approved additional English proficiency tests for the Student Direct Stream (SDS) visa scheme, ending IDP’s monopoly alongside the British Council. Competitors like the Pearson Test of English could erode up to 30% of IDP’s market share in Canada, which accounts for roughly 25% of its IELTS volumes.

• UK Policy Shifts: Restrictions on dependant visas and uncertainty surrounding the Graduate Route have led to a 24% drop in student placements.

• Australia’s Student Caps: Proposed caps on international students and higher visa rejection rates have triggered a 25% decline in placements, further squeezing revenue.

Where To From Here?

Following the announcement, analysts downgraded their outlooks:

• UBS upgraded to Buy from Neutral; cut target from $12.00 to $4.95

• Morgan Stanley downgraded to Equal-weight from Overweight; target cut from $17.95 to $4.25

• JPMorgan retained Neutral; target cut from $11.90 to $4.25

• Macquarie retained Outperform; target cut from $16 to $6.40

Macquarie’s report highlighted significant earnings forecast cuts of 33%, 48%, and 45% for FY25, FY26, and FY27, respectively. They now expect FY25 net profit after tax of $69 million, down from $104 million, with dividend forecasts for FY25-27 reduced by 35-50%. Analysts noted, “Student placement volumes were worse than expected, down 28-30% in FY25, with re-elected governments in Canada and Australia failing to improve sentiment, UK post-work visa changes looming, and US visa restrictions adding pressure.”

Despite the grim outlook, Macquarie remains optimistic about IDP’s long-term potential for double-digit growth, though current trading is hampered by negative rhetoric and anti-student immigration policies, expected to stabilise in FY26.

Another potential headwind, given the share price fall, is the company's removal from the S&P/ASX 100 Index, which could trigger further selling pressure from ETFs, index trackers and institutional investors.

The Bottom Line

Sentiment around IDP is now battered, with analyst target price cuts reflecting execution risks and earnings uncertainty. While the stock appears deeply oversold, bearish overhangs persist, including limited visibility into FY26, deteriorating demand in key markets, and potential index exclusion. And if there's one thing the market hates – its uncertainty.

Some positives remain: UBS and Macquarie point to cost reduction efforts, strong pricing, and potential IELTS approval in China as incremental tailwinds. However, these are overshadowed by IDP’s broader challenges, leaving the stock in 'no man's land' about near-term recovery prospects.