Navitas

BUSN1001 Assignment

Business Report

Introduction

Objectives and Techniques

The objectives of this report are to analyse Navitas Limited (NVT) if NVT is a good company to

invest on, to compare NVT and a competitor using various analysis, to provide the insight of

NVT and the economy. For this, we are separating it to Business and Strategic Analysis for

theoretical analysis of the company, and Financial Analysis for the quantitative analysis of the

company.

Competitor

The chosen competitor is G8 Education Limited (GEM). As opposed to NVT, GEM is not a

global provider in higher education and vocational training. But GEM is the leading child care

centre operation in Australia, which makes GEM an indirect competition when it comes to

investment. The disadvantage of using GEM as competitor is both NVT and GEM do not offer

similar services and they are not at the same size in terms of companys structure.

Structure

This introduction aims to give you an overview of the report, followed by Business and

Strategic Analysis. Here we look into the companys business activities and strategies, the

economy and the industry outlook, and the companys future profitability. For Financial

Analysis, we will be comparing with the ratio analysis, trend analysis and common size analysis

with a chosen competitor, industry statistics with Education and Training industry and other

available media information. We will be able to judge the financial strengths and weaknesses of

NVT with Financial Analysis. We then conclude it with recommendations whether NVT is a

good company to invest on.

Brief Conclusion

For risk-neutral or risk-lover investors, the recommendation after the analysis would be NVT is

a good company to invest on. However, if the investor is risk-adverse, it is advisable to not

invest in NVT due to the uncertainties in industry and economic outlooks, even though the

business and strategic analysis provide positive outlooks.

Business and Strategic Analysis

Business Activities

Navitas separated their business activities into three parts, University Programs, SAE Institute,

Professional and English Programs (PEP). With its University Programs, Navitas offers pre-

university and university programs across different countries. With SAE Institute, Navitas

provides higher and vocational education, offering studies on audio and film production; and

creative media. (Navitas 2015)

With its Professional and English Programs (PEP), Navitas pairs professional degrees with

placement service. This program is aimed at international students, migrants and refugees to

equip them with proficiency in English and preparation for work. Additionally, under PEP, the

Navitas Resources Institute provides corporate clients a customised program to build workforce

capability. On the other hand, Cadre develops online learning test and knowledge sharing

solutions. (Navitas 2015)

Economy Outlook and the Implication on its Future Profitability

The economy is moving towards further modernisation. This results in decline in the

manufacturing and agricultural industry but an increase in services in terms of share of output

(Australian Industry Report 2014). The Australians standard of living is considered high where

Australians enjoy high quality of goods and services. This is proven with Organisation for

Economic Co-operation and Development (OECD)s Better Life Index, where Australia is

ranked at 10th among 30 developed countries (OECD Australia 2014). In February 2015, the

Reserve Bank of Australia reduces the cash rate (RBA 2015). Subsequently it affects the

Australian currency where it depreciates to its lowest in six years (ABC 2015).

In general, it is fair to say that as income increases, there is an increase in demand for goods and

services. Since NVT covers a wide range of education services, this indicates possible higher

profit in the future as the demand for quality services in general should increase. With a

weakened Australian currency and lower interest rate, NVT might experience an increase in

foreign investment since the currency is affordable. NVT might not be doing well in the

domestic economy since it is more expensive to consume other goods and services, which might

indirectly affect the proportion spent on education services like NVT. However, domestic

demand on education in Australia has been high, hence it is likely that the proportion spent on

education services will remain.

Industry Outlook and the Implication on its Future Profitability

NVT falls under the Education and Training industry under the Social Service Sector (Industry

2015, p. 71). The industry has strong growth over the past five years with high demand from

domestic students (Ibisworld 2015). While this looks surprising, 25% out of the 1.3 million

students enrolled in universities of Australia was international students (Ibisworld 2015). The

number has been falling as Australian currency was high over the past years (SMH 2014). With

the lower Australian currency, the industry is looking optimistic with more international

students to enrol. As for the vocational training industry where NVT is also part of, the industry

is estimated to grow at a rate of 5% in the next 5 years (Ibisworld 2015).

The industry is looking optimistic with expected higher enrolment from international students

and continuing support from domestic market. With the expected growth in education and

training sector, NVT would benefit since it covers higher education and vocational training. The

lower Australian currency might encourage migration where itd benefit the third business unit,

PEP.

Company Outlook and the Implication on its Future Profitability

In early February 2015, NVT loses one of the university partner, Macquarie University (ABC 2

2015). This news resulted in a fallen of share price and reduction in profitability. However this

is offset by the increase of enrolment due to weakening of Australian currency as mentioned

above. NVT brands themselves as a global leader in providing higher education and vocational

training service, which is true. NVT has a strong network across the globe, providing customers

easy access to global education (Navitas 2015). However NVT also faces competition from

institutions like universities and colleges.

By just looking at companys outlook, it is difficult to judge its future profitability. This would

be better examined by using the Financial Analysis below.

Companys Strategy and the Implication on its Future Profitability

NVT has sound plans in improving the company, domestically and internationally (Navitas

Annual Report 2014). Competitively, NVT in 2014 is focusing on the continuing expansion of

its first business activity, University Programs. NVT also seeks improvement in the second

business activity, SAE Institutes internal capability and product expansion. NVT will also be

undergoing review of the Sales and Marketing function with expansion of the resources in

respective countries.

Corporately, NVT will strengthen the senior management capability across divisions and to roll

out scorecard approach in measuring and communicating strategy. NVT has a strategy map and

has addressed the business risks with suggested solution plans.

NVT management has certainly put thoughts into the strategies to improve the company

competitively and corporately. While the outcome has yet to be observed, NVTs detailed plan

and risk management policy are confidence booster for investors. If NVT can follow the

strategic plan and with positive economic activities, future profitability is looking optimistic.

Financial Analysis

Ratio Analysis - Current Ratio

NVT Current Ratio for 5 Years

2014 2013 2012 2011 2010

0.529 0.524 0.450 0.473 0.531

GEM Current Ratio for 5 Years

2014 2013 2012 2011 2010

1.435 2.001 1.306 1.001 1.826

A higher current ratio means a higher liquidity for the company (Porter & Norton 2006 p. 78,

79). NVTs current ratio has been consistent at around 0.5, it means that NVTs current assets

would not be enough to cover the current liabilities. As compared to GEM, its current ratio has

been more than 1.000 since 2010 which put GEM in a better and assuring position than NVT in

comparing current ratio.

Ratio Analysis - Profit Margin

NVT Profit Margin for 5 Years

2014 2013 2012 2011 2010

5.45% 10.32% 10.75% 12.24% 11.30

GEM Profit Margin for 5 Years

2014 2013 2012 2011 2010

11.23% 12.51% 11.08% 11.96% 5.24%

A high profit margin indicates a good control in terms of expenses. The ratio represents the

company is generating revenue and minimising its expenses at the same time (Porter & Norton

2006 p. 80). NVT was consistent between 2009 and 2013 before plunging to 5.45%, this could

be explained with the appreciation of Australian dollar causing a decrease in enrolment for

international students. For GEM, they have managed to stay at a consistent profit margin since

2011.

Ratio Analysis - Debt to Equity Ratio

NVT Debt to Equity Ratio for 5 Years

2014 2013 2012 2011 2010

2.454 2.063 1.727 1.733 2.558

GEM Debt to Equity Ratio for 5 Years

2014 2013 2012 2011 2010

0.853 0.581 0.477 0.640 0.668

NVT has more debt than stockholders equity as compared to GEM which always has less debt

than equity (Porter & Norton 2006 p. 490). However it does not mean NVT is performing badly

than GEM. It means that the company has a higher leverage where the extra borrowed money

can be used to benefit the company and stockholders.

Ratio Analysis - Time Interest Earned Ratio

NVT Time Interest Earned Ratio for 5 Years

2014 2013 2012 2011 2010

17.548 13.316 15.878 35.145 848.246

GEM Time Interest Earned Ratio for 5 Years

2014 2013 2012 2011 2010

7.528 10.311 11.582 12.522 5.597

Both companies have a small amount of interest obligations compared to their income available

to meet those obligations. With these ratios, creditors are confident that each company will be

able to meet its interest obligations on its long-term debt.

Profitability

Ratio Analysis - Earnings per Share

NVT Earnings per Share for 5 Years (000 cents)

2014 2013 2012 2011 2010

21.8 19.9 19.5 21.7 18.8

GEM Earnings per Share for 5 Years (000 cents)

2014 2013 2012 2011 2010

16.15 11.28 8.95 9.27 3.20

Higher earnings per share have indicated that NVT is more established. But GEM has the

advantage with higher rate of increment and this places GEM as an attractive investment to

provide higher returns.

Ratio Analysis - Price/Earnings Ratio

NVT P/E Ratio for 5 Years

2014 2013 2012 2011 2010

23.3% 32.3% 24.1% 18.1% 20.5%

GEM P/E Ratio for 5 Years

2014 2013 2012 2011 2010

25.8% 28.0% 18.2% 4.9% 29.4%

Plotting NVTs and GEMs P/E Ratio to graphs, we could see fluctuations from 2010 2014.

P/E ratio is often thought as the quality of the company earnings (Porter & Norton 2006 p.

659). A high P/E ratio might indicate the share being overpriced and a low P/E ratio might

indicate the share being underpriced. The NVTs EPS and P/E ratio are similar which indicate a

fairer return to investors.

Ratio Analysis - Dividend Payout Ratio

NVT Dividend Payout Ratio for 5 Years

2014 2013 2012 2011 2010

0.463 0.513 0.518 0.553 0.569

GEM Dividend Payout Ratio for 5 Years

2014 2013 2012 2011 2010

0.004 0.003 0.002 0.00001 0.003

NVT has paid a higher and consistent dividend which makes it more interesting than GEM, this

is reasonable as NVT is a bigger and global company as compared to GEM.

Ratio Analysis - Dividend Yield Ratio

NVT Dividend Yield Ratio for 5 Years

2014 2013 2012 2011 2010

1.988 1.586 2.149 3.429 2.772

GEM Dividend Yield Ratio for 5 Years

2014 2013 2012 2011 2010

0.014 0.011 0.012 0.022 0.011

NVT provides a higher dividend yield which once again a better choice than GEM.

Trend Analysis Balance Sheet

In Trend Analysis for Balance Sheet, we can see that there is sudden reduction 2014 for retained

earnings for NVT as compared to be consistent retained earnings for GEM. This is largely due

to difference in foreign exchange. For non-current liabilities, GEM has increased massively

which GEM will have to account for payback in the future. NVT has a consistent cash and cash

equivalents in the current assets which make it a safer investing choice.

Trend Analysis Income Statement

-100%

-50%

0%

50%

2014 2013 2012 2011

Trend Analysis for NVT

Retained Earnings

Borrowings

Cash and cash equivalents

-200%

0%

200%

400%

600%

2014 2013 2012 2011

Trend Analysis for GEM

Retained Earnings

Borrowings

Cash and cash equivalents

A trend analysis in income statement shows that even revenue has increased for NVT, the profit

and income decreased due to large amount of expense. This could be worrying as the drastic fall

brings a pessimistic outlook for the company. Whereas GEM has been improving since 2012,

with its revenue, profit and income increase.

Common Size Statements Analysis

Using Vertical Analysis, from NVTs balance sheet in 2014 (GEM Annual Report 2014), cash

and cash equivalents increase from 7.80% in 2013 to 9.83% in 2014. Total current assets

increase from 23.66% in 2013 to 27.65%. Total current liabilities increases from 45.16% in

2013 to 52.26% in 2014. The increase is balanced by a decrease in retained earnings, from 5.53%

in 2013 to 2.46% in 2014.

From NVTs income statement in 2014 (NVT Annual Report 2014), we use revenue as the

benchmark. Profit for the year decreases from 10.26% in 2013 to 5.78% in 2014. Total

comprehensive income for the year 10.32% in 2013 also decreases from 5.45% in 2014. This is

the profit margin, as calculated above.

From GEMs balance sheet in 2014, cash and cash equivalents decrease from 23.66% in 2013 to

12.05% in 2014. Total current assets also decrease from 26.57% in 2013 to 14.82%. Total

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2014 2013 2012 2011

Trend Analysis for NVT

Revenue Profit Income

0%

20%

40%

60%

80%

100%

120%

2014 2013 2012 2011

Trend Analysis for GEM

Revenue Profit Income

current liabilities decreases from 13.28% in 2013 to 10.33% in 2014. The slight decrease is

balanced by an increase in borrowings, from 22.91% in 2013 to 35.20% in 2014.

From GEMs income statement in 2014, we use total revenue as the benchmark. Profit for the

year decreases slightly from 11.31% in 2013 to 10.73% in 2014. Total comprehensive income

for the year 12.51% in 2013 also decreases from 11.23% in 2014. This is the profit margin, as

calculated above.

Comparison with Industry Statistics

Under the Australian Securities Exchange (ASX), NVT is classified under Consumer Services.

Referring to Appendix, the industrys average P/E ratio is 22.133 with a market share of 3.64%

in 2014. Based on the ratio analysis above, NVTs 2014 P/E ratio is 23.3% which is on par with

the industry.

Comparison with Other Information

Here we exclude the data for 2014 as the 2014 financial report for Higher Education Providers

(Finance Publications 2010-2013) compiled by the Department of Education and Training has

not been released. This is different from ASXs classification of customer service. The analysis

includes private higher education and vocational training which NVT is classified in it. For

borrowings, NVT has not been the same as what majority of the other higher education

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2013 2012 2011

Trend Analysis for NVT

RetainedEarnings

Borrowings

0%

5%

10%

15%

20%

25%

30%

35%

2013 2012 2011

Trend Analysis for Higher Education Programme

RetainedEarnings

Borrowings

Cash andcashequivalents

institutions, this could be due to NVTs different company approach. For retained earnings,

NVT is not exactly following the trend of others either. However, NVT has been doing better in

terms of cash and cash equivalents in their current assets, which is above 12% for three years as

compared to the total of a maximum of 7% from the industry.

Financial Strength and Weaknesses of NVT

Based on ratio analysis, NVT does not look convincing with its recent current ratio, profit

margin, debt-to-equity ratio. However, NVT did well at the profitability ratio with a higher Time

Interest Earned Ratio, EPS, P/E Ratio. The solvency ratio for NVT is also better with higher

Dividend Payout Ratio and Dividend Yield Ratio. NVT biggest weakness is the downfall in

2014 which might make existing and potential investors lose confidence. The sharp reduction in

profit margin is not optimistic and NVT has to hope that they can rebound from it.

Conclusion and Recommendation

Summary

NVT is a unique provider for education. There is no close substitute of NVT, at least not in the

region of Australasia. The business and strategic analysis alone could not tell us if NVT is a

good investment but pairing up with Financial Analysis, it gives a good indication. NVT is a big

and long-term company which has a slip in 2014 due to economy outlook. The company has

been consistent and doing well in other aspects in the previous years.

Limitations and Improvements

NVTs closest competition would be private and public universities however there is not an

education group which comprises pre-university, university, vocational training and English

program under the same roof. The comparison is not exactly the best we could come up with. If

the competitor does not have to be listed under ASX, there is a better way to compile those

institutions which provide similar services. As for the industry classification in ASX, NVT is

classified under consumer services which also include hotel and gaming services. When it

comes to industry statistics, it is not the best representation of NVTs true industry classification.

This could be improved by looking purely at the Education and Training sector under the Social

Service industry.

Conclusion

NVT is a good company to invest on but not in these two years. Judging by the economy

outlook, it is still uncertain of the change in Australian currency though a lower currency would

mean a better profitability in the market. As a risk-adverse investor, this is not recommendable.

It is also due to the ambiguity after the lost of a big university partner. It is uncertain that if NVT

can recover its revenue from this loss.

Judging by the industry and company outlook, the company is looking for improvement and as a

risk-adverse or a risk-lover investor, you can consider NVT as a good company to invest as it

has a good chance for higher profit margin and dividend after a bad year. It might not be as good

as the years before 2013, but it should give a fair return.

Appendix Reference List

Navitas (2015), Navitas Limited Accessed 28th April 2015

Australian Industry Report (2014), Department of Industry, <

http://www.industry.gov.au/industry/Office-of-the-Chief-

Economist/Publications/Documents/Australian-Industry-Report.pdf>, Accessed 28th April 2015

OECD (2014), Organization for Economic Co-Operation and Development, <

http://www.oecdbetterlifeindex.org/countries/australia/ >, Accessed 28th April 2015

RBA (2015), Reserve Bank of Australia, , Accessed 28th April 2015

ABC (2015), Australian Broadcasting Corporation, , Accessed 28th April 2015

SMH 2015, Sydney Morning Herald, , Accessed 28th April 2015

IBIS (2015), IBISworld ,

, Accessed 28th April 2015

ABC 2 2015, Australian Broadcasting Corporation, , Accessed 28th April 2015

Porter, Gary & Norton, Curtis (2006), Financial Accounting: The Impact on Decision Makers

(5th Edition), South-Western College Pub

Finance Publication (2010-2013), Department of Education and Training,

, Accessed 4th May 2015

Appendix Financial Analysis

Ratio Analysis - Current Ratio

Ratio Analysis - Profit Margin

Ratio Analysis - Debt to Equity Ratio

Ratio Analysis - Time Interest Earned Ratio

Ratio Analysis - Earnings per Share

Ratio Analysis - Price/Earnings Ratio

Ratio Analysis - Dividend Payout Ratio

Ratio Analysis - Dividend Yield Ratio

All ratios are calculated using the financial statements of NVT available on <

https://navitas.com/corporate/investors> and GEM available on <

http://g8education.edu.au/investor-information/annual-reports/> and formulas from the textbook.

Trend Analysis Balance Sheet

NVT 2014 2013 2012 2011 2010 NVT 2014 2013 2012 2011

Retained Earnings 17,973

39,666

37,986

45,145 36,741

Retained Earnings -55% 4% -16% 23%

Borrowings 123,530

148,226

133,308

135,833 - Borrowings -17% 11% -2% 0%

Cash and cash equivalents

111,836

96,230

81,719

72,592 61,727

Cash and cash equivalents 16% 18% 13% 18%

GEM 2014 2013 2012 2011 2010 GEM 2014 2013 2012 2011

Retained Earnings - 15,242

- 16,099

- 5,900 - -

Retained Earnings -5% 173% - -

Borrowings 352,944

110,436

46,532 - 1,638 Borrowings 220% 137% - 0%

Cash and cash equivalents

120,804

114,043

21,790

14,166 8,016

Cash and cash equivalents 6% 423% 54% 77%

Source: NVT and GEM annual reports 2010 - 2014

Trend Analysis Income Statement

NVT 2014 2013 2012 2011 2010 NVT 2014 2013 2012 2011

Revenue 878,219

731,734

688,530

643,812

556,743 Revenue 20% 6% 7% 16%

Profit 50,802

75,051

73,620

77,234

62,813 Profit -32% 2% -5% 0%

Income 47,871

75,542

74,019

78,823

62,886 Income -37% 2% -6% 25%

GEM 2014 2013 2012 2011 2010 GEM 2014 2013 2012 2011

Revenue 491,288

275,165

179,991

137,950

66,392 Revenue 79% 53% 30% 108%

Profit 52,731

31,072

19,209

17,250

3,480 Profit 70% 62% 11% 0%

Income 54,127

34,345

19,841

16,465

3,480 Income 58% 73% 21% -

Source: NVT and GEM annual reports 2010 - 2014

Common Size Statements Analysis

All ratios are calculated using the balance sheet and income statement of NVT and GEM for

2014.

Comparison with Industry Statistics

Average P/E %Market

Jan 22.9 3.6

Feb 21.8 3.7

Mar 21.8 3.6

Apr 22 3.6

May 22.4 3.6

June 21.9 3.6

July 22.9 3.7

Aug 22.8 3.7

Sept 21.6 3.7

Oct 22.9 3.7

Nov 21.7 3.7

Dec 20.9 3.5

AVERAGE 22.13333333 3.641666667

Source: Average P/E ratio and Market Share, ASXs Consumer Service Sector from Jan 31 2014 Dec 31 2014, AFRsmartinvestor

Comparison with Other Information

NVT 2013 2012 2011 2010 NVT 2013 2012 2011

Retained Earnings 39,666

37,986

45,145

36,741 Retained Earnings 4% -16% 23%

Borrowings 148,226

133,308

135,833 - Borrowings 11% -2% 0%

Cash and cash equivalents

96,230

81,719

72,592

61,727

Cash and cash equivalents 18% 13% 18%

HEP 2013 2012 2011 2010 HEP 2013 2012 2011

Retained Earnings 26,609,239

24,659,443

22,881,279

21,519,804 Retained Earnings 8% 8% 6%

Borrowings 2,904,224

2,650,757

2,007,416

1,813,430 Borrowings 10% 32% 11%

Cash and cash equivalents

3,537,193

3,535,365

3,307,761

3,171,973

Cash and cash equivalents 0% 7% 4%

Source: NVTs Annual Report 2010-2013 and Finance Publication 2010-2013