New Oriental Education: Spotlight On Outlook And Buybacks
Contributor since 2012 / 12039 Followers
Summary:
- New Oriental Education’s top line growth outlook is favorable, thanks to the success of EDU’s livestreaming e-commerce business and the recovery of its overseas businesses.
- But EDU could have done better in terms of utilizing share repurchases as a tool to tackle the issue of its stock’s undervaluation.
- My rating for New Oriental Education is a Hold; EDU’s revenue growth prospects are good, but I am disappointed with the company’s approach toward share buybacks.
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Elevator Pitch
I assign a Hold investment rating to New Oriental Education & Technology Group Inc. (NYSE:EDU) stock.
EDU’s revenue growth outlook is positive, but this alone isn’t sufficient to push up the company’s share price. New Oriental Education’s actual share repurchases in the last one year didn’t meet my expectations, and I would have hoped that the company will increase its share buyback authorization, which wasn’t the case. Considering both the favorable top line prospects and the below-expectations share buybacks, I deem a Hold rating for New Oriental Education to be fair.
Company Description
New Oriental Education refers to itself as “China’s leading private education service provider” with respect to the “number of program offerings and geographic presence” in the company’s corporate fact sheet. As indicated in its media releases, EDU’s products and services include “educational services and test preparation courses, online education” programs, “overseas study consulting services, and educational materials and distribution.”
The Number Of Learning Centers And Schools Operated by New Oriental Education In The Past Years
EDU’s Corporate Fact Sheet
EDU’s number of schools and learning centers have declined significantly since FY 2022 (YE May 31) as indicated in the chart presented above. New Oriental Education disclosed previously in November 2021 that the company had to shut down its “K-9 Academic AST (After School Tutoring) Services” business to comply with new regulations in Mainland China. In its most recent 20-F filing, EDU noted that it had started a new livestreaming e-commerce business known as “East Buy” in FY 2022 as part of efforts to find new areas of growth for the company.
Revenue Growth Outlook
New Oriental Education’s top line growth prospects are excellent, considering the company’s sales guidance and the sell-side analysts’ forecasts.
EDU has guided for its revenue to grow by +55% YoY from $524.0 million in the fourth quarter of fiscal 2022 to $812.3 million for Q4 FY 2023 based on the mid-point of its financial guidance. The company’s top line contracted by -57% YoY for Q4 FY 2022, while its sales increased by +23% YoY in Q3 FY 2023. As such, New Oriental Education’s management team is anticipating a substantial improvement in its top line performance in the final quarter of fiscal 2023.
Separately, the market sees New Oriental Education’s top line expanding by +21% for the next fiscal year, FY 2024. It is noteworthy that the sell-side’s consensus FY 2024 revenue estimate for EDU has increased by +8% and +20% for the past three months and the last six months, respectively.
In my opinion, the favorable revenue growth outlook for New Oriental Education in the upcoming quarter (Q4 FY 2023) and full fiscal year (FY 2024) is realistic, taking into account two key growth drivers.
The first key growth driver is EDU’s livestreaming e-commerce business, East Buy.
New Oriental Education stressed at its Q3 FY 2023 earnings briefing that “East Buy has proved itself as a successful business” that provides “a remarkable contribution to the company’s overall revenue and profit growth.” EDU has yet to reveal the exact sales and profitability of its new livestreaming e-commerce business, but third-party research indicates that East Buy is doing very well.
According to an April 20, 2023, research report (not publicly available) issued by Mainland Chinese broker SWS Research titled “Recovering Educational Businesses”, EDU is estimated to have derived 29% of its Q3 FY 2023 top line from East Buy. Based on SWS Research’s assessment, East Buy should have delivered a very healthy 15% net profit margin in the most recent quarter, which is higher than the company’s Q3 FY 2023 overall normalized net margin of 12.6%. It is fair to say that New Oriental Education has found a new growth driver (in the form of East Buy) to partially compensate for the loss of revenue from K-9 after-school tutoring services which used to contribute over half of EDU’s top line.
The second key growth driver is the improvement in the top line performance of New Oriental Education’s overseas businesses.
At the company’s most recent third quarter results call, EDU emphasized that it is “optimistic about the overseas related businesses going forward.” Revenue for New Oriental Education’s overseas study consulting and overseas test preparation services business units rose by +5% and +13%, respectively in Q3 FY 2023 on a YoY basis.
As COVID-19 restrictions continue to be relaxed around the world, demand for EDU’s overseas study consulting and overseas test preparation services businesses continues to grow. At the same, New Oriental Education is well-positioned to benefit from industry consolidation in these specific businesses, as weaker and sub-scale competitors have exited these segments in recent years.
In summary, I have a positive opinion regarding New Oriental Education’s revenue outlook.
Valuations And Share Buybacks
New Oriental Education’s valuations have remained depressed in the past year. Based on S&P Capital IQ’s valuation data, EDU’s consensus forward next twelve months’ Enterprise Value-to-Revenue or EV/S valuation metric is 0.89 times now, and its EV/S valuation multiple has never exceeded 1.4 times in the last one year. Similarly, the market currently values New Oriental Education at 6.4 times consensus forward next twelve months’ EV/EBITDA, and EDU’s EV/EBITDA ratio has only gone up to as high as 11.0 times for the past one year.
In other words, it is reasonable to make the claim that EDU’s shares have been trading at pretty attractive valuations in recent times, and there are lots of opportunities for the company to be aggressive with its share buybacks.
Unfortunately, New Oriental Education’s actual share repurchases have fallen short of my expectations. At the end of May this year, EDU has only completed slightly less than half of its initial one-year $400 million share buyback plan which was first initiated on July 28, 2022. While New Oriental Education has extended its share repurchase program by another year to end on May 31, 2024, it is disappointing that EDU hasn’t expanded its share buyback authorization alongside the extension. Instead, New Oriental Education has $209 million (equivalent to 3% of EDU’s market capitalization) remaining from its initial share repurchase authorization as of end-May 2023.
I am of the view that New Oriental Education should have allocated more capital to share buybacks for the July 28, 2022-May 31, 2023 period, and also expanded its share buyback authorization in tandem with the extension of the current share repurchase program. EDU’s favorable revenue growth outlook and its undemanding valuations imply that future share buybacks are most probably going to be value-accretive. I think that New Oriental Education has missed a golden opportunity to leverage on share buybacks as a catalyst to re-rate its shares.
Closing Thoughts
Investors are increasingly judging companies based on both their financial performance and capital allocation strategies. A company which delivers good financial results and allocates capital in a value-accretive manner is well-positioned to enhance shareholder value. In the case of New Oriental Education, the company’s revenue outlook is promising, but it could have done better in the area of share repurchases. This explains my decision to award a Hold rating to EDU.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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