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The New Criterion: in any language, English testing is a lucrative market

The federal government may have succeeded in cleaning up the woeful private vocational education sector, but now faces a fresh issue in its quest to protect the $35 billion foreign student trade. Foreign students may have emerged as Australia’s third biggest export industry, but the problem is that too many students are deficient in English and given most courses are taught in the Queen’s language it’s not exactly a shortcoming that Google Translate can rectify. Last year Australia hosted 179,342 foreign students learning English, an increase of 1 per cent on the previous year and a 10 per cent rise on four years ago. It’s a $2.4 billion-a-year industry. Students who come directly to higher education courses need to have passed a so-called high stakes test called International English Language Testing System IELTS (or similar). But many come here to learn English first in view of vocational educational courses, in which case the testing is up to the institutions. While students ultimately are supposed to have English proficiency, the issue has been inflamed by the willingness of some institutions to lower their standards to keep the students – and the dollars – flowing. Students in effect are lured to sub-standard foundation programs that do not give them the adequate English skills to complete their studies. With Canberra concerned about the impact on Australia’s reputation as a prized education destination, another crackdown looms as part of a broader review initiated by federal education minister Dan Tehan. Last year, the government toughened requirements for intensive English language courses that enable direct entry into universities. Against this backdrop, iCollege (ICT, 5.7c) and its TestEd arm last month signed a deal with Cambridge University’s Cambridge Assessment English to become Cambridge’s quasi exclusive seller of its Linguaskill tests in Australia. The tests are an easy and accredited means for colleges and employers to appraise regularly their students’ and workers’ English skills. Cambridge Assessment English, the British Council and our very own IDP Education (IEL, $16.40) own the better-known International English Language Testing Systems, or IELTS, a so-called ‘high stakes’ test used to appraise would be or newly-arrived migrants (IELTS is one of five such tests accepted by the Department of Home Affairs). As well as bearing the Cambridge imprimatur, the digital-based Linguaskill tests can be done remotely over the computer, with the results correlating to the IELTS test. The test is also accepted by Europe’s English gatekeeper, the Common European Framework of Reference. “There’s no subjectivity about it,” iCollege chairman Simon Tolhurst says. Arguably iCollege’s biggest selling point is that Linguaskill is cheaper, which makes it more palatable for ongoing testing. IELTS, we should note, also has a $65 progress (practice) test. All four skills (speaking, writing, reading and listening) are computer-delivered for the iCollege test,whereas for the high-stakes tests oral tests are usually conducted face-to-face with a qualified assessor. iCollege estimates an addressable annual market of 100,000 tests per annum, which at an average of $140 a throw equates to revenue of $14 million. Tolhurst cautions the estimate “could be higher or could be lower”. It all depends on the take-up level from the colleges and employers. “But we didn’t do this deal without testing the market,” he says. “There seems to be genuine interest among the various groups.” The company envisages that a university could buy Linguaskill to test the English proficiency of all international students prior to graduation (and have the test results within 48 hours). Alternatively, a large corporation or recruitment agency could implement Linguaskill into its pre-employment practices to verify the English proficiency of staff and/or job candidates. A provider of courses in disciplines including hospitality, aged and disability care, occupational safety and life skills for prison parolees, iCollege turned over $$8.2m in the year to June 2019 and made an $8.2m loss. In February last year iCollege more than doubled the size of its business with acquisition of Manthano, which was oriented to hospitably courses and the international student market generally. Despite this corporate engorgement, in any language the Linguaskill franchise should make for a meaningful addition. However the new rules unfold, English testing is big business. Rising from the ashes Pay attention class, you will be tested! The listed education sector lives on, despite the implosion of the vocational sector that saw the collapse of the hapless Vocation, the Australian Careers Network and Intueri. Investor choice has been further limited by the $2 billion take-out of sector behemoth Navitas by parties including founder Rod Jones and Australian Super, Shares in the expanding, Sydney based Redhill Education (RDH, $2) have sagged from $4 in October last year, which arguably is an overreaction to the cost of its Melbourne expansion and increased executive level costs (including compliance) The Melbourne business was only founded four years ago but now accounts for 30 per cent of revenue and is being expanded by another 50 per cent. Redhill shares have halved over the past year. Redhill’s full year net profit also fell 15 per cent to $3m, in line with earlier guidance, on revenue of $60m (up 10 per cent). The company has also been expanding its Sydney based Greenwich business, which is the biggest provider of intensive language courses. Greenwich, which accounts for $33.5m of Redhill’s total revenue, grew 8 per cent Part owned by the sandstone universities, IDP carried out performed 1.28m IELTS tests – “the world’s most trusted English language test’’ – in 44 countries, for an average fee of $280 versus $269 previously. Put another way the tests accounted for $360m of the $598m of revenue gleaned by IDP, which operates an extensive foreign student recruiting network. IELTs testing also accounted for 46 per cent of IDP’s gross profit of $334m, with English language teaching contributing a further 5 per cent. The IELTs tests also accounted for 46 per cent of IDP’s gross profit of $334m, up 20 per cent, with teaching accounting for a further 2 per cent. Another survivor of the shakeout of listed education provider is the 111-year old Academies Australasia Group, (AKG, 66c), which provides vocational and pathway courses at nine campuses (including Singapore). Academies’ full year net profit climbed 8 per cent to $4.8m, on revenue of $66.6m (also up 8 per cent). International students accounted for $53m of this revenue, up 12 per cent, offsetting a 30 per cent decline in domestic student take-up. Academies shares are in a purple patch, having climbed 67 per cent over the last year. The company is now debt free, having had $15m of borrowings four years ago. Academies’ $86m market valuation is also supported by $15m of cash. Tim Boreham edits The New Criterion tim@independentresearch.com.au Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense. ENDS

  • 25 Nov 19
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The New Criterion - Copper Market Update

Copper Market Update Copper is presently engaged in a tug-of-war between negative near-term factors and positive longer-term considerations. Copper is facing near-term economic/trade-related concerns on the one hand, which have negatively impacted metal pricing and demand; whilst on the other hand the outlook is positive based on the prospect that copper mine supply will fail to keep up with burgeoning electric vehicle (EV) demand, along with other applications. These near-term negative issues have adversely impacted the share prices of copper producers and aspiring producers alike, making it harder for them to gain market traction and generate the funding that will help bring to new copper supply to market. Near-Term Outlook While the global manufacturing sector has experienced significant headwinds so far in 2019, a revival of optimism in copper end-users could fuel a wider improvement over the coming months and into 2020. Countermeasures to US trade tariffs have contributed to a rebound in Asian manufacturing, suggesting that although demand pressures remain weak, there is the prospect of some relief to the current slowdown. The IHS Markit Global Copper Users PMI is a composite indicator that provides an overview of operating conditions at specific manufacturers identified as heavy users of copper. It is based on data provided by companies around the globe. As many copper users are producers of primary manufacturing goods, the index that measures output levels can also provide an indication of the direction of global manufacturing output. The Global Copper Users PMI rose above 50.0 during September, indicating the first improvement in business conditions since November 2018. Key to the upturn was a moderate expansion in output, the fastest for a year, as firms looked to build stocks of manufactured goods in hopes of stronger future demand levels. On a regional basis, Asian copper users have seen the greatest change in the output trend this year. Production during the second half of 2018 was mired by the introduction of US tariffs on Chinese goods, causing a downturn in new orders and subsequent output cutbacks across the region. China responded with fiscal stimulus measures to ease tax burdens on manufacturers, which helped soften the decline and, more recently, lift production levels. As Asia accounts for a large proportion of the global copper-using industry, this has had a notable impact on global output levels - and could signal a boost for the world manufacturing sector. Historically, the Global Copper Users PMI Output Index has correlated strongly with the Global Manufacturing PMI Output Index, so the latest upturn in copper usage offers some optimism that this could transform into higher output in other industrial sectors. That said, caution is require, as Asian copper PMI data have shown greater volatility in recent times, particularly as Asian operating conditions have diverged from those seen in European and US markets. Despite the overall improvement amongst copper users, the impact on prices is likely to remain subdued. The increase in new orders from Asian manufacturing users during September was only marginal, while demand across the global copper-using industry declined as a result of weak conditions in European markets. Stronger output growth has therefore left manufacturers over-stocked, signalling that input buying may weaken during the fourth quarter unless demand levels improve. The new order-to-inventory ratio (derived from the Copper Users PMI data) suggests a downwards impact on prices, with the year-on-year change remaining negative. In addition, copper remains in good supply, despite reports of a 2% fall in global mining production in 2019. Weak manufacturing demand has meant that shortages are low, indicating that there is unlikely to be a supply-side squeeze in the near term. There are some positive factors that may help support copper prices. For instance, China has announced additional stimulus measures for its domestic economy, which may boost manufacturing demand during the fourth quarter. Also, there have been further trade talks between the US and China, although sentiment toward these discussions has been mixed. The trade war remains the number one issue affecting the global industrial sector, so any progress could lead to upward pressure on copper prices. Either way, the underlying PMI picture has become more positive, suggesting a possible rebound in the Asian copper-using industry, albeit one that is likely to leave prices subdued for now. Upcoming data releases will confirm whether higher output levels can be maintained or whether demand stagnates again. Longer-Term Outlook There is a strong feeling that growth in electric vehicle production is going to push copper demand well beyond production over the coming years. Matt Badiali at Banyan Hill Research recently stated in Barrons that the world will need to produce 5 million metric tons of copper per month by 2030 - about 2.5 times more than it will produce this year - in order to meet projected demand from the electric-vehicle industry. Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense. The production trend for electric vehicles has certainly been upward and cannot be ignored. However, the question is how much growth will occur? There have been many stops, starts and sputters in the vehicle industry over the years. Petrol prices are also a big variable going forward. The U.S. is pumping out enough oil to probably put a cap on major price increases for the foreseeable future. However, having a more environmentally-friendly vehicle has also been a driving force for many electric vehicle consumers. Will that continue or will it dissipate over time? Or, will alternatives like liquid natural gas, fuel cells or biodiesel become the alternative that the vehicle industry gravitates toward in the next 10 years? The investment bank, Jeffries, is forecasting a 1 million metric ton deficit in 2024 without copper miners expanding their production capabilities. Goldman Sachs has a similar projection. The deficit could grow to 4 million metric tons by 2028. This of course could lead to a tight supply situation, as annual world copper production is about 18 million metric tons. It would seem that miners would be able to expand production to fill in this supply gap, but that might not be likely. Higher prices tend to lead to more production and lower prices tend to cause producers to produce less. This is a generalization, but it is the typical cycle that happens time and again in commodities. There are significant capital costs to open new mines and even to ramp up production at current mines. CEOs and CFOs of mining companies like Freeport-McMoRan and Rio Tinto typically don’t like to invest heavily in expansion during periods of falling prices, which has been the case in recent years. It remains to be seen how much production will increase in the coming years, as it could be considered fairly risky by copper producers to do so in the current environment. It could be very interesting if prices continue to decline and producers curtail production or at least don’t expand production. The supply gap could be even greater if the forecasted demand materializes. Conclusion In the copper market at present, speculators are very much focused on the here and the now. Fears over trade, economic growth and political instability, have taken centre stage for the time being. These concerns have led to pessimism and lower levels of investor interest generally in the copper sector. However as we know, things can change very quickly. Investor sentiment can change rapidly, particularly if a trade deal between the US and China can be reached. From a bigger picture perspective, the outlook for copper remains positive. There are big question marks over the supply-side’s capacity to meet burgeoning demand. Of course, higher prices will ultimately flush out new sources of supply, but at the present time flat prices are hampering the development of new supply. Current circumstances have the potential to delay the onset of new copper mines, thus making the supply gap even worse. For savvy investors, now is likely an appropriate time to be evaluating copper equities.

  • 24 Nov 19
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ECA
The eInvest Cash Booster Fund (‘the Fund’ or Ticker: ECAS)

eInvest Cash Booster Fund (‘the Fund’ or Ticker: ECAS) is an Exchange Traded Fund (ETF) that listed on 11 November 2019. It is very low risk, return Australian debt and term deposits (TDs) mandate managed by Daintree Capital Management Pty Limited (the ‘Manager’ or ‘Daintree’), a Sydney based boutique fixed income specialist founded in 2017 as a 50/50 joint venture (JV) with PVM Capital Partners Ltd (Perennial)). The Fund targets an annualised return of RBA Cash + 50-75 basis points (bps) after fees with consistent monthly income while trying to minimize volatility, negative performance months and drawdowns. ECAS is designed to be an alternative to TDs, with the additional benefit of daily liquidity. ECAS is a newly formed investment strategy with existing track-record, but IIR notes the Manager has successfully managed the Daintree Core Income Trust and the Daintree High Income Trust since July 2017 and November 2018, respectively. The Manager utilises a bottom up, top down investment strategy that is flexible and market driven opportunistic, with the Manager seeking the most attractive relative value opportunities and to do so with the lowest degree of credit, duration, and illiquidity risk to achieve the stated returns target. That said, given the low risk-return nature of the Fund and expectation of the underlying portfolio comprising the upper tier on investment grade debt securities and a material allocation to TDs, there will be natural limits to the degree to which manager skill can add value. While Daintree is relatively newly formed, the founding partners, Mark Mitchell and Justin Tyler, are experienced fixed income industry veterans. INVESTOR SUITABILITY ECAS should be viewed strictly as a term deposit alternative, with the benefit of daily liquidity, and the potential for a marginal degree of enhanced income over prevailing TD rates. The real benefit for investors relative to TDs is the daily liquidity and ease in investing by way of the ETF structure. On account of both, ECAS may represent a suitable strategic asset allocation option for investors seeking to either temporarily or indefinitely partly reallocate out of riskier asset classes. While ECAS represents a new investment strategy, IIR notes that over the Daintree Core Income Trust’s two year track-record, the Manager’s risk-return objectives have been achieved. Furthermore, during this period, there have been no negative monthly periods, including during the investment grade credit spread widening events from March to June 2018 and November and December 2018. Monthly distributions have been smooth and consistent. In a peer group analysis, the Trust has outperformed in every important measure (returns, risk, negative months). In short, IIR has a high degree of confidence in the Manager achieving the investment objectives for ECAS, notwithstanding the investment strategy’s absence of a track-record. RECOMMENDATION IIR ascribes a “RECOMMENDED” rating to the Fund. Daintree, while having a short track record as an entity, represents an experienced investment team led by its two industry veteran portfolio managers (PMs), Mark Mitchell and Justin Tyler. While the boutique manager may not have the resources of larger investment managers, the Manager plays to its relative strengths and has developed internally robust processes and systems. While less relevant to ECAS than the Manager’s other two higher risk-return investment strategies, IIR believes, in particular, its ability to manage the ever increasing downside risks in the traded debt markets sets it apart from many other comparable mandates available to domestic investors. We also believe its flexible, market driven opportunistic investment strategy is best suited to the current market environment, the key dynamics of which (low yields, heighten volatility and tail risks, material long duration risk) IIR believes will persist for the foreseeable future. In short, IIR believes ECAS represents a sound investment option for its stated and intended use as a daily liquid TD alternative.

  • 24 Nov 19
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The eInvest Core Income Fund (‘the Fund’ or Ticker: ECOR)

The eInvest Core Income Fund (‘the Fund’ or Ticker: ECOR) is an Exchange Traded Fund (ETF) that is expected to list on 22 November 2019. It is an absolute return, global investment grade traded debt mandate managed by Daintree Capital Management Pty Limited (the ‘Manager’ or ‘Daintree’), a Sydney based boutique fixed income specialist founded in 2017 as a 50/50 joint venture (JV) with PVM Capital Partners Ltd (Perennial). The Fund targets an annualised return of RBA Cash + 150-200 basis points (bps) after fees with consistent monthly income while trying to minimize volatility, negative performance months and drawdowns. ECOR will invest in underlying units of the Daintree Core Income Trust, an unlisted unit trust that commenced on 1 July 2017. The bottom up, top down investment strategy is flexible, being benchmark unaware and market driven opportunistic, as the Manager seeks the most attractive relative value opportunities and to do so with the lowest degree of credit, duration, and illiquidity risk to achieve the stated returns target. Being absolute returns, there is a strong focus on downside protection. The investment strategy rests on a philosophy that with yields being at historic lows and secular changes in the traded debt markets heightening volatility and tail risks, it is no longer prudent for an investment manager to simply be long credit risk, duration or the illiquidity premium. The portfolio comprises two components - the ‘Core Portfolio’ and the ‘Overlay Portfolio’, with 85-90% of returns expected to derive from the former, and the residual from the latter. Through both, the intention is to construct a portfolio that generates absolute returns by combining active credit management, a diversified overlay strategy and conservative risk management. While Daintree is relatively newly formed, the founding partners, Mark Mitchell and Justin Tyler, are experienced fixed income industry veterans. INVESTOR SUITABILITY ECOR is designed as an enhanced cash, term deposit alternative, providing an enhanced and consistent level of monthly income with a limited degree of capital appreciation upside and a very strong focus on downside protection. IIR notes that over the Trust’s two year track-record, the Manager’s risk-return objectives have been achieved, with the Trust having generated an annualised net return of 206 and 299 basis points over the RBA Cash Rate since inception and over the last 12-months to 31 October 2019, respectively (3.5% p.a. vs 2.1% p.a. Term Deposits vs 1.4% p.a RBA Cash Rate). These returns reflect the 15bps higher fee in the Trust versus ECOR (60bps until 30 June 19 and then dropped to 50bps). During this period, there have been no negative monthly periods, including during the investment grade credit spread widening events from March to June 2018 and November and December 2018. Monthly distributions have been smooth and consistent, generating income of 2.8% in its first full year period. In a peer group analysis, the Fund has outperformed in every important measure (returns, risk, negative months). IIR believes ECOR is a suitable enhanced TD alternative, with the additional benefit of ECOR being effectively ‘at call’, i.e. daily liquidity. RECOMMENDATION IIR ascribes a “RECOMMENDED PLUS” rating to the Fund. Daintree, while having a short track record as an entity, represents an experienced investment team led by its two industry veteran portfolio managers (PMs), Mark Mitchell and Justin Tyler. While the boutique manager may not have the resources of larger investment managers, the Manager plays to its relative strengths and has developed internally robust processes and systems. IIR believes, in particular, its ability to manage the ever increasing downside risks in the traded debt markets sets it apart from many other comparable mandates available to domestic investors. We also believe its flexible, market driven opportunistic and absolute returns investment strategy is best suited to the current market environment, the key dynamics of which (low yields, heighten volatility and tail risks, material long duration risk) IIR believes will persist for the foreseeable future. In short, IIR believes ECOR represents a strong investment option for its stated and intended use as an enhanced cash TD alternative.

  • 24 Nov 19
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