IDP Education. Further tests on the horizon

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1 3 May 2017 Asia Pacific/Australia Equity Research Education Services Rating UNDERPERFORM Price (02-May,A$) 4.65 Target Price (A$) 4.00 Target price ESG risk (%) Market cap (A$mn) 1,163.9 Yr avg. mthly trading (A$mn) 28.0 Projected return: Capital gain (%) Dividend yield (net %) 3.2 Total return (%) Target price is for 12 months. Research Analysts Lucas Goode lucas.goode@credit-suisse.com Andrew Dodds andrew.dodds@credit-suisse.com Performance 1M 3M 12M Absolute (%) Relative (%) (IEL.AX / IEL AU) INITIATION Further tests on the horizon We initiate on IEL with A$4.00 target price, UNDERPERFORM rating. Despite attractive industry fundamentals in international education and a strong recent growth track record, we view IEL as expensive given exposure to regulatory changes in Student Placement and multiple risks in Testing. Positive macro drivers, but an ever-present regulatory threat. Overall we are relatively optimistic on the near-term prospects for IEL's Student Placement business (~4 of IEL gross profit) given broadly supportive government policy and solid industry fundamentals driven by growing demand for the English language education in Asia. However, we note that Australian placement volumes fell 4 FY09-12 due to adverse immigration policy changes and the current political rhetoric may be moving in an unhelpful direction. While we see incremental upside from expansion of services in China, following the deregulation of the international student counselling sector, this is offset by the uncertain impact of technology on what is a highly fragmented and human capital-intensive industry. Testing times ahead for IELTS. The English Testing business (~5 of IEL s gross profit) grew at a 13% CAGR FY12-16 driven primarily by expansion of IEL's geographic footprint and strong migration trends. However, the business faces multiple risks: (1) IELTS no longer has a monopoly on high-stakes English testing in the Australian market; (2) delivery technology is changing and IELTS has been slow to market with an online test; and (3) both the IELTS partnership agreement and China Agreement with British Council can be terminated by any party on a 12-month notice. UNDERPERFORM, A$4.00 target price. IEL is a high quality business with a clearly defined strategy. However, the growth trajectory is highly dependent on a supportive regulatory environment and we see potential risks as skewed to the downside at the current price. We view 27x FY17 P/E as expensive for a company with IEL's regulatory exposure and possible tail risks. Financial and valuation metrics Year 6/16A 6/17E 6/18E 6/19E Revenue (A$ mn) EBITDA (A$ mn) EBIT (A$ mn) Net Income (Adj.) (A$ mn) EPS (Adj.) (Ac) Change from previous EPS (%) n.a. EPS growth (%) Consensus EPS (Ac) P/E (x) Dividends (Ac) Dividend yield (%) Price/Book (x) Net debt/ebitda (x) (0.5) (0.0) (0.0) (0.2) Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 (IEL.AX / IEL AU) Price (02 May 2017): A$4.65; Rating: UNDERPERFORM; Target Price: A$4; Analyst: Lucas Goode Income Statement 6/16A 6/17E 6/18E 6/19E Revenue EBITDA Depr. & Amort. (7) (6) (9) (10) EBIT Associates Net interest exp. 0 0 (0) (0) Other Profit before tax Income tax (14) (19) (22) (25) Profit after tax Minorities Preferred dividends Associates & Other Normalised NPAT Unusal item after tax Net profit (Reported) Balance Sheet 6/16A 6/17E 6/18E 6/19E Cash & equivalents Inventories Receivables Other current assets Current assets Property, plant & equip Intangibles Other non-current assets Non-current assets Total assets Payables Interest bearing debt Other liabilities Total liabilities Net assets Ordinary equity Minority interests Preferred capital Total shareholder funds Net Debt (28) (2) (0) (15) Cash Flow 6/16A 6/17E 6/18E 6/19E EBIT Net Interest Depr & Amort Tax Paid (17) (18) (22) (25) Change in Working capital (3) Other cash and non-cash items (0) Operating cashflow Capex (9) (11) (13) (12) Capex - expansionary Capex - Maintenance Acquistions & Invest Asset sale proceeds Other Investing cashflow (9) (51) (26) (12) Dividends paid (48) (29) (38) (44) Equity raised Net borrowings Other financing cash in/(outflows) (15) Financing cashflow (48) (29) (38) (44) Total cashflow (13) (26) (1) 15 Adjustments Movement in cash/equivalents (13) (26) (1) 15 Earnings 6/16A 6/17E 6/18E 6/19E Equiv. FPO (period avg) (mn) EPS (CS adj.) (c) EPS growth (%) DPS (c) Dividend Payout (%) Free CFPS (c) Valuation 6/16A 6/17E 6/18E 6/19E P/E (CS) (x) PEG (x) EV/EBIT (x) EV/EBITDA (x) Dividend Yield (%) FCF Yield (%) Price to book (x) Returns 6/16A 6/17E 6/18E 6/19E Return on Equity (%) Profit Margin (%) Asset Turnover (x) Equity Multiplier (x) Return on Assets (%) Return on Invested Cap (%) Gearing 6/16A 6/17E 6/18E 6/19E ND/ND+E (%) Net Net Net Net Net Debt to EBITDA (x) Cash Net Cash Net Cash Net Cash Net Int Cover (EBITDA) (x) Cash na Cash na Cash Cash Int Cover (EBIT) (x) na na Capex to Sales (%) Capex to Depr (%) MSCI IVA Rating AA G L C S G Environment Social Governance Global Local Country Stock Share price performance C L S G C L S Source: Company data, Credit Suisse estimates On 02-May-2017 the S&P ASX 200 Index closed at On 02-May-2017 the spot exchange rate was A$1.33/US$1 (IEL.AX / IEL AU) 2

3 Table of contents Focus charts 4 Executive Summary 5 Key investment themes... 5 Company overview 10 Leading global education services provider International education: Macro tailwinds vs regulatory risk 14 Long term structural growth industry Material exposure to regulatory changes Student placements the growth engine 16 Multi-Destination strategy has fueled recent growth Regulatory risk is ever-present Potential for disruption of the physical agency model Wide range of potential outcomes IELTS testing times ahead? 24 Volume growth impacted by competition Reliance on non-profit third parties a risk Forecast modest long term volume growth overall English Teaching and Hotcourses 29 Logical adjacencies for IEL Historical financials and estimates 31 Earnings drivers and historical performance Earnings forecasts Key risks 36 Valuation and Target Price 38 Underperform, $4.00 Target Price Sensitivity analysis Peer comparison HOLT valuation Environmental, Social, Governance 43 Appendices 46 (IEL.AX / IEL AU) 3

4 Focus charts Figure 1: IEL group revenue Figure 2: IEL group EBITDA $400m 3 $70m 3 $350m $300m $250m $200m $150m $100m $50m $60m $50m $40m $30m $20m $10m $0m FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16-1 $0m FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16-1 Revenue (A$m) Growth EBITDA (A$m) Margin Source: Company data, SEEK Source: Company data, SEEK Figure 3: IEL segmental revenue split (1H17) Figure 4: IEL segmental gross profit split (1H17) English Teaching 6% Other 3% English Teaching 7% Other Student Placement 28% English Testing 48% English Testing 63% Student Placement 4 Source: Company data Source: Company data Figure 5: IEL Student Placement volumes Figure 6: IEL English Testing volumes FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16-1 Placement volumes (000s) Growth Testing volumes (000s) Growth Source: Company data, SEEK Source: Company data, SEEK (IEL.AX / IEL AU) 4

5 Executive summary is a leading global provider of high-stakes English language testing and international student placement services. The company is a co-owner of the IELTS English language test and is the market leader in the placement of international students into Australian education institutions. In recent years, the company has expanded its student placement offering to include other destinations (UK, USA, Canada and New Zealand). IEL also provides English language teaching in South East Asia and recently acquired the online education business Hotcourses. Initially a not-for-profit organisation owned by a coalition of Australian universities, IDP transitioned to become a for-profit business in 2006 when SEEK Limited acquired a 5 stake (SEEK sold its shareholding in the company's 2015 IPO). The company now has around 90 offices across 30 countries in addition to over 400 testing locations. Key investment themes Macro tailwinds: International education is a large and growing industry International student numbers have grown steadily over the last two decades, driven by favourable demographic trends in source countries and (usually) supportive government policy in host countries. Education is Australia's third largest export sector worth around $20bn annually and is a significant funding source for universities across IEL's destination countries. Global inbound higher education student numbers have increased every year since 1999 (at a worldwide CAGR of over 6% p.a ). A growing Asian middle class is key to this dynamic. Over half of international students come from Asia, with China and India the two largest individual source countries. The proportion of students from these countries can be even higher for specific destinations. For example, 3 of international higher education students in Australia in 2012 were Chinese. Approximately 8 of students placed by IEL are sourced in Asia. Demand for international education is skewed towards English language destinations with developed infrastructure to support international students. Countries in which IEL currently places students account for over 4 of international higher education enrolments (likely the majority if movement between EU countries is excluded). Increasing international student mobility, particularly into English-speaking countries, drives demand growth across Student Placement and English Testing, resulting in attractive macro dynamics for the business as a whole. Figure 7: Global inbound international student enrolments 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Students Growth 16% 14% 12% 1 8% 6% 4% 2% Figure 8: Global inbound international student share by country (2014) 47% 6% 6% 4% 1% 1 2 Australia Canada New Zealand UK USA France Germany Other Source: UNESCO Source: UNESCO (IEL.AX / IEL AU) 5

6 Placement growth has been strong but regulatory risk is ever-present Although English Testing is the largest division by revenue, Student Placement has been IEL's main source of incremental earnings growth in recent years. Total Student Placement volumes rose at a 13% CAGR over the FY12-16 period, driven by solid growth in Australia and the company's successful expansion into other destinations as part of its Multi-Destination strategy. International education policy in Australia is broadly supportive (despite recent moves to potentially limit immigration and pathways to permanent residency), while IEL is growing strongly off a low base in other markets and is thus less exposed to systemic issues such as increasingly restrictive UK and US visa regimes. However, despite the recent strong growth we note that on a longer-term view, placement volume growth has been far less consistent. Australian volumes declined materially between FY09 and FY12 due to a tightening of student visa requirements and reduced employment rights for international students (other external factors including a high AUD and widely publicised attacks on foreign students also played a role). IEL's Australian placement volumes fell ~4 FY09-FY12 (-16% CAGR) and have yet to return to peak, although this partially reflects reduced involvement in the vocational training space with higher education placements believed to be roughly back to FY09 levels. That volumes took seven years to recover from previous regulatory changes despite the macro tailwinds supporting the sector demonstrates the scale of the impact that adverse regulatory and political decisions can have on IEL's Student Placement business. International education is a major export for destination countries and there is a material fiscal impact on institutions of discouraging international enrolments. However, future systemic shocks to the sector remain a concern, particularly given the recent increase in protectionist rhetoric from both political parties in Australia and international leaders. Figure 9: IEL student placement volumes FY FY12 FY13 FY14 FY15 FY16 1H16 1H17 Figure 10: IEL historical Australian Student Placement volumes volumes 24% below peak due to VET Higher ed flat FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY Australia Multi-Destination Total (pre-fy14) IEL Australian placement volumes (000s) Growth Source: Company data, SEEK Source: Company data, SEEK, Credit Suisse estimates Testing growth reliant on geographic expansion due to local competition IEL is the sole distributor of the IELTS test in Australia and previously enjoyed a monopoly on high stakes English testing in the country. However, the Department of Immigration and Border Protection began accepting rival tests from late 2011 and we estimate that domestic IELTS testing volumes have been declining in the mid-teens in recent periods. We expect market share losses to stabilise as IEL rolls out a computer-based version of IELTS later this year (eliminating a competitive disadvantage against rival tests), however domestic volumes, 28% of total in FY15, will likely continue to decline in the near term. IEL has been able to offset the impact of the loss of its Australian testing monopoly by expanding its footprint in other markets, often in competition against IELTS co-owner (IEL.AX / IEL AU) 6

7 British Council (e.g., entry into Japan in FY16). However, entry into additional markets is likely to become less meaningful over time (given IEL already administers tests in over 50 countries) and the IELTS test itself is relatively mature and may face incremental competition in some markets. As a result it appears that absent an unwinding of the China Agreement (see below) growth in the English Testing business has likely peaked. Figure 11: IEL English Testing volumes Figure 12: Australasia IELTS test volumes FY10 FY11 FY12 FY13 FY14 FY15 FY H15 2H15 1H16 2H16 1H17-2 Testing volumes (000s) Growth Australasia volumes (000s) Growth Source: Company data, SEEK Source: Company data, Credit Suisse estimates and subject to cooperation from not-for-profit partners IEL is a 'co-owner' of the IELTS test along with two UK non-profits, British Council and Cambridge Assessment. CA produces the test (with IEL paying CA a fee per test equivalent to ~6 of the average test price), while BC competes against IEL in most regions in the delivery of the test. There is no long-term contract between the IELTS partners, any of whom can terminate the current agreement on 12 months' notice. Although the status quo benefits all parties, there is no guarantee that IEL's partners won't look to amend the terms in a manner unfavourable to IEL in the future (or dissolve the existing arrangement altogether). Outside of economic concerns, there is also a risk that the other parties may not agree with IEL on other matters such as content development and delivery mechanisms (e.g. computerbased testing). Additionally, 15-2 of IEL's group EBITDA is contributed by the China Agreement, under which British Council effectively compensates IEL for BC's monopoly position in IELTS testing in China by paying IEL a fee for each test delivered in the country. Despite the current arrangement being in place since 2008, there is no long-term contract in place with the current 12-month agreement expiring in June. Though the current agreement appears to benefit both BC and IEL (and there may be long-term upside in the event of nonrenewal through enabling IEL to administer tests in China), a termination or material change in terms is a key short-term earnings risk for IEL. Structural and technological changes present opportunities and threats IEL's businesses are human capital-intensive and subject to digital disruption. This is likely to provide both opportunities and threats for IEL in the coming years. For example, as Internet penetration and comfort in using online resources grows over time, potential international students may feel more comfortable in applying to institutions directly while the institutions themselves can effect a larger global reach without the need to engage (and pay) agents. We note that prospective students from more developed economies are less likely to use agents while IEL's Australian placement volumes appear to have lagged system growth (i.e. total international higher education commencements) even during the recent period of strong growth. (IEL.AX / IEL AU) 7

8 Figure 13: Likely use of education agents by region, 2007 to East Asia Africa Southern Asia Latin America Europe Figure 14: IEL Australian placement volume growth vs total international tertiary commencements Yes Maybe No IEL placements (FY) Total commencements (CY) Source: British Council Source: Company data, SEEK, Department of Education and Training We note that there is a lot of noise in the data (e.g., placements into non-higher education courses) and variance in agent usage may also reflect cultural preferences. IEL's brand strength, strong reputation and superior online resources (including recently acquired Hotcourses) provide scope for it to grow share in a highly fragmented market. Nonetheless, international student placement is an evolving industry where some form of structural change appears likely. Virtual agencies are another potential threat to the physical agency market, and one in which IEL itself is experimenting through Hotcourses. Within English Testing, the lack of a computer-based delivery method may have been a contributor in IELTS ceding share to competitors such as PTE and TOEFL in Australia. An online test also enables more tests at a given location and a quicker turnaround (currently ~13 days for IELTS vs 5 days for PTE). IEL expects to have online testing capability live by 1HFY18 and we expect this to moderate share losses in Australia for IELTS. Strong growth forecast; highly dependent on supportive environment We forecast FY17F EBITDA of $69mn (+13%) on 8% revenue growth to $391mn. Over the medium term, we model 9% revenue CAGR and 13% EPS CAGR through FY20F. Downside risks to our forecasts include adverse regulatory changes affecting international student enrolments; increased competition for IELTS in key markets; and material changes (including termination) to the IELTS partnership and/or China Agreement. Key drivers of upside are share gains in student placements and incremental opportunities in China following partial deregulation of the student recruitment industry in that country. Figure 15: IEL group revenue forecasts Figure 16: IEL group EBITDA forecasts $600m $500m $400m $300m $200m $100m $120m $100m $80m $60m $40m $20m % 24% 2 16% 12% 8% 4% $0m FY16 FY17F FY18F FY19F FY20F $0m FY16 FY17F FY18F FY19F FY20F English Testing Student Placement English Teaching Other EBITDA (A$m) Margin Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (IEL.AX / IEL AU) 8

9 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 3 May 2017 $4.00 target price; UNDERPERFORM rating 27x FY17F too steep given potential risks We use a discounted cash flow (DCF) as our primary valuation methodology for IEL (1 WACC, 3% terminal growth rate). Our $4.00 target price for IEL is set in line with our base case DCF valuation, resulting in an UNDERPERFORM rating. At our $4.00 target price, IEL would trade on 22x FY17F P/E, a ~1 premium to closest listed peer NVT (UNDERPERFORM, $4.00 TP) and in line with domestic global services names and global education comps. In our view, some premium is justified given IEL has outperformed NVT on an operational basis in recent years and NVT will always face the risk of further contract losses. However, we view the current >3 spread (on a FY17F P/E basis) as too wide given similar underlying macro and regulatory exposures and note that IEL's placement volumes were more heavily impacted than NVT's Australian enrolment numbers under the restrictive visa regime during the period. We have considered the sensitivity of our valuation to underlying assumptions around growth in international student migration (including the impact of any regulatory changes), IEL's share of international student placements across its source/destination countries and the impact of competition on the IELTS English language test both in Australia and abroad. These 'blue sky' and 'grey sky' scenarios give a valuation range for IEL of A$2.80 to A$5.05 per share (corresponding to a FY17F P/E of 16x to 29x). Growth in adjacent areas (particularly value added services in China) could add incremental value, however we have not explicitly quantified that upside at the current time. IEL is a quality business with a clearly defined growth strategy and a solid near-term outlook that is currently benefiting from macro tailwinds. However, we view IEL as expensive on 27x FY17F P/E and see potential catalysts (loss of share in English testing, tighter visa and/or immigration restrictions in destination countries, changes to the IELTS and/or China agreements) as being skewed to the downside at current levels. There also remains difficulty to quantify tail risk surrounding the longevity of the IELTS partnership and China Agreement. The current arrangements have been in place for many years and benefit all parties. However, as we have seen with NVT (e.g., loss of Macquarie University pathway contract), a positive economic rationale is no guarantee of an ongoing relationship with public sector entities who may have competing objectives. We have not factored any changes (including termination) to current arrangements into our forecasts or valuation, however the possibility of an adverse change/ termination adds to our view that the current multiple is not adequately factoring in the potential risks facing the business. Figure 17: IEL P/E since IPO Figure 18: FY17F P/E relative to peers 30x 28x 26x 24x 22x 20x 18x 16x 14x 12x 10x IPO at 19x P/E 27x 22x 20x 32x 27x 25x 15x 15x 16x 36x 26x 26x 14x 16x 12x Source: Company data, Credit Suisse estimates, I/B/E/S Source: Company data, Credit Suisse estimates, I/B/E/S. Note: Calendarised for a June year end. (IEL.AX / IEL AU) 9

10 Company overview Leading global education services provider is a leading global provider of high-stakes English language testing (IELTS) and international student placement services. The company also provides English language teaching courses in South East Asia, and has more recently extended its product suite into digital education services via the acquisition of online course listings business Hotcourses. Initially a not-for-profit organisation owned by a coalition of Australian universities, IDP transitioned to become a for-profit business in 2006 when SEEK acquired a 5 stake in the business (SEEK later sold its shareholding in the company's 2015 IPO). 5 of IEL is now owned by Education Australia, a company owned by 38 Australian universities, with the remaining 5 traded on the ASX. IEL's geographic footprint is predominantly focused on Asia-Pacific (namely China, India and Australia/NZ), although the successful development of its "Multi-Destination" strategy within Student Placements has expanded its reach into new markets such as the United Kingdom, United States and Canada. The business primarily derives revenues through the IELTS English Testing segment (63% of 1H17 revenues) and Student Placement (28% of 1H17 revenues). While only 17% of group revenue was booked in Australasia in 1H17, this contribution rises to ~3 if Student Placement revenue is recorded by destination rather than source as the majority of placements are still to Australian institutions. Figure 19: IEL revenue by segment (1H17) Figure 20: IEL revenue by geography (1H17) English Teaching 6% Other 3% RoW 2 Australasia 17% Student Placement 28% English Testing 63% Asia 63% Source: Company data Source: Company data, Credit Suisse estimates. Co-owner and sole Australian provider of IELTS English language test The International English Language Testing System (IELTS) is a three-way joint venture partnership entered into by IEL, the British Council (BC) and Cambridge Assessment (CA). The commercial relationship between the three parties has been in place ~30 years. Broadly speaking, IEL and BC are responsible for the distribution, administration and supervision of the IELTS tests globally at their respective testing facilities, while CA produces the actual content of the IELTS tests. IELTS is the world's most common high-stakes English language test, with over 20 million test conducted by IEL and BC since In FY16, IEL administered 857k IELTS tests at more than 400 testing locations in ~50 countries globally. IEL generates income from the administration of each test taken, in addition to receiving a royalty from BC for the latter's exclusivity in administering the IELTS tests in mainland China. (IEL.AX / IEL AU) 10

11 IEL and BC compete with each other in many countries in delivering the test. At present, IEL is the sole Australian provider and although the IELTS Agreement does not legally prohibit BC from administering tests in Australia it is thought to be unlikely that they would do so. In return, IEL does not compete with BC in the UK. While IELTS is the global leader in high stakes English language testing it does face competition most geographies. The three most widely recognised alternative tests available to participants are Pearson Test of English (PTE), Test of English as a Foreign Language (TOEFL) and Certificate of Advanced English (CAE), the latter of which is produced by IELTS co-owner Cambridge Assessment. Prior to November 2011, IELTS was the only English language test accepted by DIBP in relation to Australian visa applications. However, the Department has since expanded the list of approved tests to include PTE, TEOFL and CAE, and as a result IELTS testing volumes in Australia have been declining in recent periods, offsetting international growth driven largely by expansion into new locations. English Testing volume growth slowed to 3% in 1H17 from 17% in FY15. The English Testing business is particularly sensitive to currency movements as IEL's payments to CA for the test (~6 of the testing fee) are denominated in GBP. Figure 21: IEL English Testing volumes Figure 22: IEL English Testing revenue FY $250m FY10 FY11 FY12 FY13 FY14 FY15 FY16 Testing volumes (000s) Growth $200m $150m $100m $50m $0m FY12 FY13 FY14 FY15 FY16 1H16 1H17 English Testing Growth Source: Company data Source: Company data, Gartner, Credit Suisse estimates The IELTS examination agreement can be terminated at 12 months notice by any one of the three JV partners. The agreement does not specifically outline the consequences of termination, however unless IA, BC or CA agree that copyright in the materials, reports and publications and the test itself can be used by the parties following termination, it is likely that none of the parties would be able to use such rights and therefore would be unable to administer the IELTS examination. We note that while the agreement is somewhat unusual and legal recourse for IEL in the event of a termination may be limited, it is clearly in the best interests of all three parties to maintain the status quo. Largest provider (by far) of student placements into Australia IEL's Student Placement business provides counselling, assistance and guidance to students seeking to enroll in offshore educational institutions. IEL generates income by collecting fees from its partner institutions in order for placing students with them (equivalent to around 12% of the first year's tuition). In a highly fragmented industry, IEL is by a distance the largest provider of placement services into the Australian market with a ~4 share of placements and ~2 share of total international student enrolments (not all international students use an agent). IEL has ~90 support offices in over 30 countries worldwide. China and India contributed 22% and 14% of total placements respectively in FY15, while Asia as a whole was responsible for ~8. (IEL.AX / IEL AU) 11

12 IEL's sole destination market prior to 2010 was Australia, resulting in a significant adverse volume impact when the Federal Government introduced tighter student visa regulations and reduced post-study work rights. These changes were subsequently largely reversed as a result of the Knight Review and we understand that higher education placements into the Australian market for IEL have since returned to the previous peak (although reported volumes are still lower than FY09 due to IEL largely exiting the VET sector). As part of its "Multi-Destination" strategy, the company expanded its product offering into the US, UK, Canadian and New Zealand markets. IEL now has service agreements with over 600 education institutions across its five destination countries. In addition to diversifying IEL's geographic risk, partnering with educational institutions outside of Australia has also enabled IEL to materially grow its total addressable market (students usually have a particular destination country in mind when enlisting the services of an agent or counselor). IEL's Multi-Destination volumes have grown strongly off a low base and now represent approximately one-third of total placements. Globally, IEL placed over 30k students in FY16. Figure 23: IEL Student Placement volumes ( 000) FY12 FY13 FY14 FY15 FY16 1H16 1H17 Figure 24: IEL Australian placement volumes volumes 24% below peak due to VET Higher ed flat FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY Australia Multi-Destination Total (pre-fy14) IEL Australian placement volumes (000s) Growth Source: Company data Source: Company data, Gartner, Credit Suisse estimates IEL receives what it calls an Application Processing Fee (APF) from its client institutions for the successful placement of a student into a course. This typically equates to a fee of approximately 12% of the student's first year of tuition (~A$3,000 in FY16). The combination of strong volume growth, stable local currency APF growth due to the implicit link to higher education course fees (which have historically risen above inflation) and currency tailwinds drove 22% Student Placement revenue CAGR FY Figure 25: IEL Student Placement revenue FY12-16 Figure 26: IEL Student Placement yield growth $100m $90m $80m $70m $60m $50m $40m $30m $20m $10m $0m FY12 FY13 FY14 FY15 FY16 1H16 1H17 Student Placement Growth $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1 12% 9% 6% 3% -3% FY12 FY13 FY14 FY15 FY16 1H17 Avg APF (A$) Reported growth Constant ccy growth Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (IEL.AX / IEL AU) 12

13 English Teaching a profitable niche in South East Asia IEL also provides English Teaching services in South East Asia, where it established its first English school in Thailand in Today, IEL operates teaching courses across 10 locations in Cambodia, Vietnam and Thailand. Courses range from short courses (20 hours tuition) to students desiring an upper-intermediate level of general English (up to 4 years). The total number of English courses taken by students in FY16 was just under 70k, representing a 14% increase on the prior year driven largely by the opening of a new campus in Cambodia. While the Teaching business is comparatively small and limited to South East Asia, we understand that it is relatively high margin and there remains the potential to open additional campuses in the three countries (which have historically reached capacity quickly). Figure 27: IEL English Teaching revenue Figure 28: IEL English Teaching volumes $25m $20m $15m $10m $5m $0m FY12 FY13 FY14 FY15 FY16 1H16 1H17 0 1H15 2H15 1H16 2H16 1H17 English teaching revenue Growth Student Volumes (000s) Growth Source: Company data Source: Company data, Gartner, Credit Suisse estimates Hotcourses acquisition the first step on the online pathway IEL announced in January 2017 that it had acquired the UK-based online education search business Hotcourses for 30 mn ex-cash. Hotcourses is the world's largest online educational course database, listing ~600k courses from almost 1,000 educational institutions. Its websites had over 60 mn visits in Additionally, Hotcourses has established a 'virtual agency' model in India that placed over 400 international students last year. Hotcourses fits well in our view with the broader IEL portfolio as the company seeks to digitise what has historically been a heavily people-focused 'analog' business. The company's network of websites should provide IEL a competitive advantage over other agencies as a strong lead generation platform, while the 'virtual agency' model offers potential market share upside and a natural hedge against any future decline in the physical agency share of the placement industry. Within the English Testing business, IEL aims to have a computer-delivered version of the IELTS test in the market by the second half of calendar This will enable IEL to deliver multiple tests per day at the same location, shorten the turnaround time (currently ~13 days vs ~5 days for the computer-delivered PTE) and accommodate test-takers who are uncomfortable with taking the test in a face-to-face setting. In addition to possible margin benefits via greater automation, this move should erode any competitive disadvantages relative to competing tests and return focus to IELTS' status as the world's largest and most widely accepted high stakes English test. We note that CEO Andrew Barkla has a technology background and should thus be well placed to drive the exploitation of digital opportunities at IEL. (IEL.AX / IEL AU) 13

14 International education: Macro tailwinds vs regulatory risk Long term structural growth industry Student mobility on the rise International student numbers have grown strongly over the last two decades, driven by favourable demographic trends and a shortage of quality local institutions in source countries, and government policy and financial imperatives in host countries. Global inbound student numbers more than doubled in the first decade of the 2000s and have increased every year since 1999 (at a worldwide CAGR of over 6% p.a ). IEL's target markets have all grown strongly as destinations with an aggregate compound annual growth rate in line with the global average over the past 15 years. Figure 29: Global inbound international student enrolments 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , % 14% 12% 1 8% 6% 4% 2% Figure 30: CAGR in international student numbers % % 4.2% 4.2% % 6.4% Students Growth Australia Canada New Zealand UK USA France Germany World Source: UNESCO Source: UNESCO English-speaking destinations the most popular Demand and supply of international education is skewed towards English language nations with developed infrastructure to support international students, particularly Australia and the United Kingdom (with Canada growing strongly off a low base). This reflects the central role of English as the key global language as well as the desire of many prospective students to emigrate to English speaking countries. Figure 31: Global inbound international student share by country (2014) 47% 6% 6% 4% 1% 1 2 Australia Canada New Zealand UK USA France Germany Other Figure 32: International students as a share of total university student body (2012) 18.3% 13. Australia Canada 15.8% 17.1% New Zealand % 7. UK USA France Germany Source: UNESCO Source: UNESCO (IEL.AX / IEL AU) 14

15 Growing Asian middle class supporting strong demand growth The growth of middle classes in many emerging economies, particularly in Asia, is likely to drive continued demand for international education in major destination countries. Globally, more than half of all international students come from Asia, with China and India the two largest individual source countries (if intra-eu students were excluded the share would be greater still). The proportion of students from these countries can be even higher for specific destinations. For example, 3 of international higher education students in Australia in 2012 were Chinese, while 28% and 13% of international higher education students in the United States were Chinese and Indian respectively. Figure 33: Share of international tertiary student enrolments in OECD by source country (2014) Figure 34: Outbound international student volumes for key source countries in 000s (2014) 8% 26% 3% 4% China India 22% Other Asia Europe 6% Africa LatAm North Am 2 RoW China India Other Asia Europe Africa LatAm North Am RoW Source: OECD Source: OECD. Note: OECD destinations only. Material exposure to regulatory changes Visa conditions, immigration policy can have a significant impact While demand growth has remained strong through the cycle and international education is a major export for IEL's destination countries, supply disruption due to regulatory changes can have a material impact on volumes. During the period in Australia, a tightening of visa and immigration regulations (since substantially reversed as part of the Knight Review) in Australia significantly reduced international student enrolments. An increasingly restrictive visa regime in the UK has also resulted in non-eu enrolments declining in recent years despite a stated government strategy to increase the sector's value by ~66% to 30bn by Figure 35: Australian international tertiary education student enrolment growth Commencements Total enrolments Figure 36: UK non-eu international tertiary education student commencement volume 185, , , , ,000-1% 160,000-2% -7% CAGR in 155,000 commencements -3% ,000-4% / / / / /16 Students Growth 4% 3% 2% 1% Source: Department of Education and Training Source: Higher Education Statistical Agency (IEL.AX / IEL AU) 15

16 Student placements the growth engine Multi-Destination strategy has fueled recent growth 13% overall placement CAGR FY12-16 Solid growth in the number of international students studying in Australia and IEL's successful expansion into other destinations as part of its Multi-Destination strategy have driven strong volume growth in the company's Student Placement business in recent years. Overall student placement volumes rose at a 13% CAGR over the FY12-16 period and this growth rate was maintained in the first half of FY17 (+4% in Australia and +33% in Multi-Destination). Despite the recent strong growth, we note that on a longer term view placement volume growth has been less consistent due to adverse regulatory changes in Australia. Australian placement volumes declined materially between FY09 and FY12 due to a tightening of student visa requirements and reduced employment rights for international students (as well as a reduction in IEL's involvement in the vocational training sector). Although the Multi-Destination strategy has succeeded in diversifying IEL's geographic exposure, the company remains highly sensitive to political and regulatory changes in Australia (77%% of FY16 placements). The company is also exposed to regulatory risks in its other destination markets (e.g., volumes fell 29% YoY off a low base in the USA in 1H17), however given the low starting point any negative changes should be more than offset by share gains in a highly fragmented industry over the longer term. Figure 37: IEL student placement volumes Figure 38: IEL student placement volume growth 17% 17% 18% 11% 12% % -16% FY12 FY13 FY14 FY15 FY16 1H16 1H17 Australia Multi-Destination Total (pre-fy14) -22% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: Company data, SEEK Source: Company data, SEEK Global footprint feeds an increasingly global distribution of students IEL recruits students from over 90 locations in ~30 countries. The size of this network is unmatched in what is a highly fragmented and localised industry. The majority of IEL's students are recruited in the high growth Asian region. Approximately 8 of the company's students are recruited in Asia, with China and India the largest source countries at 22% and 14%, respectively. IEL commenced its Multi-Destination strategy in 2010 by offering placement services to the United States. It followed this by expanding its educational institution client base into the UK and Canada in 2011 and New Zealand in the following year. The Multi-Destination strategy is almost wholly incremental in that the majority of students have decided on a destination country before enlisting the help of a placement agent (i.e., there is very little cannibalisation of placements into Australia by also placing students into other countries). 77% of total course enrolments in FY16 were in Australia, however IEL has continued to diversify and as of 1H17 this proportion had fallen to 64%. In addition to its growing (IEL.AX / IEL AU) 16

17 Figure 39: Course enrolments by source region (FY15) footprint in source countries, the increasing proportion of Multi-Destination placements also reflects growth in the number of partner institutions in those countries, with over half of the company's clients now outside of Australia. RoW 7% China 77% 22% Figure 40: Course enrolments by destination (FY16) Other Asia 36% India 14% 13% 3% 2% Vietnam 1 Australasia 13% Australia UK USA Canada New Zealand Source: Company data Source: Company data Leading position in Australian placements IEL is the leading agency network placing international students into Australia by some distance, with an estimated share of around 2 of total placements (24.2k Australian placements in FY16 out of total international tertiary commencements of ~125k per Department of Education and Training statistics). With around half of international students in Australia using an agent, this gives IEL a market share of ~4 of agency placements. The rest of the market is extremely fragmented (EIC Education, likely the second largest placement agency globally, placed 19k students worldwide in 2010 vs 25k for IEL in Australia alone). While barriers to entry are low, IEL's scale and reputation provide strong competitive advantages in an industry where unethical behaviour is not unheard of. IEL's share of placements in Multi-Destination markets is significantly lower (we estimate ~1% in North America, ~2% in the UK and ~4% in New Zealand). IEL's scale and geographic footprint have enabled it to grow strongly off a low base in these markets, supplemented by the acquisition of Promising Education in China, a UK-focused business that provided 11 locations in China and a student placement agent licence in the country. Figure 41: Share of international student placements in Australia IEL 2 Figure 42: IEL share of total placements (agency & direct) by destination country 2 Direct entry 5 Other agency 3 4% 2% 1% 1% Australia NZ UK Canada USA Source: Company data, Department of Education and Training, Credit Suisse estimates Source: Company data, Department of Education and Training, UNESCO, Credit Suisse estimates (IEL.AX / IEL AU) 17

18 Implicit link to course fees supports yield growth For each student successfully placed in a partner institution, IEL receives an Application Processing Fee (APF) which is analogous to a commission. On average, this fee is equivalent to around 12% of the first year's tuition, although the exact percentage may vary. The link to tuition costs should drive solid yield expansion over time, all else being equal, as tuition fees for international students have historically been raised by amounts above inflation (see Figure 43). IEL's APF has grown in the mid-single digits on a constant currency basis over the past three years to around A$2,850. We model longer-term APF growth of around 3% p.a. Yield growth above this could be driven by mix shift towards higher fee paying destinations and/or continued expansion in China where agents collect money from the student as well as the client institution. Figure 43: Annual growth in international student fees at Australian universities 6% Figure 44: IEL yield growth $3,000 1 $2,500 12% 4% $2,000 9% 3% 2% 1% $1,500 $1,000 $500 $0 6% 3% -3% FY12 FY13 FY14 FY15 FY16 1H17 Avg APF (A$) Reported growth Constant ccy growth Source: Grattan Institute. Note: Weighted by course Source: Company data, SEEK Regulatory risk is ever-present Placement volumes cratered in FY10-12 While current government policy in Australia as it pertains to international student migration is broadly supportive, this has not always been the case. Beginning in late 2009, the then-labor government made a number of changes to immigration and visa legislation. These changes included a tightening of student visa regulations that made it more difficult for prospective students to meet the criteria, in addition to amendments to visa conditions that adversely impacted international students' work entitlements while studying in Australia. Coupled with secondary factors including a higher Australian dollar and widely publicised attacks on foreign students around that time, the changes resulted in international student enrolments going into reverse over the period. DET data shows a 13% reduction in international higher education commencements in 2012 vs IEL's placement volumes fell ~4 over the same period (-16% FY09-12 CAGR), with the decline exacerbated by IEL's larger involvement at the time in the vocational training space. In response to the decline in international student numbers (and the corresponding negative fiscal impact on Australian education institutions), the Government initiated the Knight review in December 2010 to find solutions to reverse the trend. The review resulted in reforms regarding streamlined visa processing for international students and increased post-study work rights. These changes increased the pool of potential candidates and improved the attractiveness of Australia as a study destination. (IEL.AX / IEL AU) 18

19 As a result of the changes implemented following the Knight review, higher education international student commencements returned to growth in 2013 and surpassed their previous peak in IEL's volumes remain well below their FY09 peak, although we understand that this is largely due to the significant reduction in placements into vocational training courses, with higher education placements approximately flat in FY16 vs FY09. That volumes took seven years to recover from adverse regulatory changes despite the macro tailwinds supporting the sector demonstrates the scale of the impact that external factors can have on IEL's Student Placement business. International education is a major export for destination countries and there is a material fiscal impact of discouraging international enrolments. For example, Exporting Education UK has estimated that tighter visa controls in the UK have cost the economy up to 8 bn since Nonetheless, the sector remains highly sensitive to political and regulatory changes and adverse developments in the future cannot be ruled out. Figure 45: International higher education enrolment growth in Australia % CAGR in commencements Figure 46: IEL historical Australian Student Placement volumes volumes 24% below peak due to VET Higher ed flat FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY Commencements Total enrolments IEL Australian placement volumes (000s) Growth Source: Department of Education and Training Source: Company data, SEEK, Credit Suisse estimates Current regulatory environment: clouds gathering Official government policy in Australia towards international student mobility remains positive, unsurprisingly so given that education is Australia's third largest export sector worth around $20 bn annually (the Government's currently stated strategy is to grow total international enrolments to 720k by 2025, or +4% p.a.). However, we are concerned that political rhetoric from politicians both in Australia and around the world is becoming more populist and anti-immigration, which could be a prelude towards adverse regulatory changes. The current climate is reflected in the Federal Government's recent announcement that it would be abolishing the 457 visa program for skilled migrants and replacing it with a more limited program that would cover fewer occupations. The proposed 457 visa changes in Australia don't directly affect international students recruited abroad. However, their post-study work rights and path towards permanent residency could be curtailed in some instances by a planned reduction in the list of eligible occupations for the Employer Nomination Scheme. In our view any regulatory changes that negatively impact overall immigration levels, poststudy work rights or a path to long term residency/citizenship are likely to have a flow-on effect on international student enrolment growth, even if student visas themselves are not directly impacted. History has shown that long term migration and employment opportunities are significant drivers of destination preferences for international students. For example, the Canadian Bureau for International Education notes that 51% of international tertiary students currently studying in Canada intend to apply for permanent residency. (IEL.AX / IEL AU) 19

20 IEL is likely to continue to grow its market share in other countries (potentially ex-usa) off the current low base, and thus we don't expect Multi-Destination revenue to be primarily driven by systemic factors in the near term (although regulatory headwinds clearly will still have some impact). Nonetheless, the political climate as it pertains to immigration and student visa availability across many destination countries remains challenging at the current time and serves as a reminder that IEL's Student Placement business is highly exposed to factors outside of its control. Potential for disruption of the physical agency model Increased direct entry opportunities from online As shown in Figure 47, prospective students from more developed parts of the world (e.g., Europe) are less likely to use agents than those from developing nations. As Internet penetration and online resources in developing nations increase over time, it is possible that the propensity to engage education agents in those regions will trend towards those of the developed world. It should be noted that variance in agent usage may also reflect cultural differences (e.g., around two thirds of Chinese students use a placement agent even though unlike other markets the agent also charges money to the student). IEL said in its prospectus that in 2013, 62% of international students commencing study in Australia used an agent, however anecdotally this number currently sits at approximately 5. This suggests that direct entry may be gaining 'share', although this is difficult to ascertain definitively (IEL refers to a range of 40-7 depending on source and destination). IEL's Australian student placement volume growth has lagged system-wide growth. While we estimate that IEL's domestic volumes grew at a 6% CAGR FY12-16, DET data shows that overall international tertiary education student commencements rose at a 1 CAGR over the same period. However, this is likely at least partially reflective of a decline in the number of international students recruited locally (something that has also impacted NVT) and is not conclusive evidence of any structural change. We note that in most regions (i.e. ex-china) students do not pay to use an agent and thus there may be limited incentive for them to go direct and eschew the guidance and counselling provided by reputable agencies such as IEL. However, the incentive for institutions to leverage the reach potentially provided by online resources to drive direct entry is clear given the cost savings and greater control involved. Figure 47: Likely use of education agents by region, 2007 to East Asia Africa Southern Asia Latin America Europe Figure 48: IEL Australian placement volume growth vs total international tertiary commencements Yes Maybe No IEL placements (FY) Total commencements (CY) Source: British Council Source: Company data, SEEK, Department of Education and Training Virtual agencies could also take share; IEL on the front foot A further possible disruption in the student recruitment market comes in the form of virtual agencies, which could introduce additional competition and lower barriers to entry. IEL (IEL.AX / IEL AU) 20

21 itself is dipping its toe into the virtual agency space. Hotcourses, which IEL recently acquired, operates a virtual agency in India which placed ~400 students last year. Although successful expansion of this model could potentially cannibalise IEL's physical placements, it could also drive increased market share (likely at higher margins). In our view virtual agencies are unlikely to displace physical locations to a significant degree in the immediate future given the importance of the decision for students and their families and the likely preference for face to face contact during the selection process in the majority of instances. Additionally, given the breadth of its network on both the recruitment and institutional side, we view growth in virtual agencies as an opportunity as well as a threat for IEL (offering market share upside relative to smaller competitors without the resources to successfully develop a virtual alternative). Nonetheless, we remain cognisant that technological change often poses risks for incumbents. IEL expects that it will source 18% of Student Placement leads online in 2017, up from 12% in This likely reflects both evolving student preferences and technological advancement as well as IEL's own investment in its digital strategy (including the Hotcourses acquisition). The hiring of CEO with a tech background to lead the company post-ipo demonstrates that it is not being complacent in dealing with the gradual digitisation of the student recruitment and enrolment process. We are encouraged that IEL is clearly investing resources and management time in developing a digital strategy, including $5m of incremental capex this year in a digital platform to drive leads, conversion and support. Figure 49: IEL Student Placement leads sourced online Figure 50: IEL digital strategy schematic 12% 14% 1 17% 18% Source: Company data Source: presentation, May F Chinese deregulation presents an opportunity Until recently, study abroad agencies in China needed a licence from the relevant provincial education authority to operate. These licences were awarded when the original legislation was introduced in the 1990s but not widely available thereafter, creating local monopolies in some regions and a 'closed shop' for new entrants. As a result, companies such as IEL have needed to operate via an arrangement with a licence-holding local entity. However, China's State Council has now canceled licensing requirements for a number of industries including study abroad counselling. While IEL's Chinese Student Placement business will still be subject to foreign ownership rules, deregulation should enable it to compete on a level playing field with local competitors, providing upside for expansion and market share gains in China, as well as opportunities in the provision of value-added services to students and their families. Given the size of the Chinese market, evolving industry structure and the difficulty of organic expansion, we also view China as a likely target for future M&A activity. This could involve either horizontal or vertical integration for IEL. In particular we note that the test (IEL.AX / IEL AU) 21

22 preparation market in China is huge, measuring in the billions of dollars for high-stakes English test preparation alone. Wide range of potential outcomes Base case forecast is Australian placement CAGR Long term estimates for IEL's Student Placement business are highly sensitive to assumptions regarding international student migration trends, the impact of regulatory changes and IEL's share of international student placements across its source/destination countries. Our base case forecasts assume CAGR in total international student commencement growth in Australia through FY20F, implying just over 160k international higher education commencements in FY20F. If international student migration into Australia were to maintain its existing growth rate (1 CAGR FY12-16), this would result in 195k international student commencements in FY20F. We view a reduction in total international student commencements in Australia as unlikely in the near term due to generally supportive government policy. However, recent political rhetoric and proposed changes regarding immigration are likely to be unhelpful and the possibility of future adverse legislation directly or indirectly impacting international student enrolment numbers cannot be ruled out. We have thus also considered a bear case scenario for international student commencements in Australia that results in a p.a. decline in FY18 and FY19 before a stabilisation in FY20 (see Figure 51). We note that international student commencements in Australia declined at a 7% CAGR between 2010 and While we view the physical agency share of the overall student placement market as under some degree of threat from digital disruption (including virtual agencies), we take a positive view on IEL's ability to gain share by improving its competitive position in China in the wake of deregulation. Combined with the possible scenarios relating to total student migration into Australia, this gives a range of total FY20F placements for IEL of 21k (-4% FY16-20F CAGR) to 39k (+12% CAGR). Our base case forecast of placement CAGR to 30k in FY20F assumes the IEL grows in line with system (i.e. stable market share). Figure 51: Australian international higher education enrolment forecasts under various scenarios 200, , , , , ,000 80,000 60,000 40,000 20, F 2018F 2019F 2020F Figure 52: IEL FY20 Australian placement volumes under various scenarios 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Bear Base Bull Bear Base Bull Bear Base Bull Lower agency use Status quo China expansion 1 12% 9% 6% 3% -3% -6% Bear case Base case Bull case FY20 volume FY16-20 CAGR Source: Company data, SEEK Source: Company data, SEEK, Department of Education and Training (IEL.AX / IEL AU) 22

23 Multi-Destination less exposed to external factors due to lower base Share gains in a fragmented market should in aggregate largely insulate the Multi- Destination component of the Student Placement business from adverse regulatory trends such as those currently being experienced in the UK and USA. However, we note that volumes in the USA (~2 of Multi-Destination total in FY16) fell 29% in 1H17, demonstrating that the business is not immune to systemic factors. Overall we have a bullish view on IEL's ability to continue to grow its share of placements to Multi-Destination countries given its strong footprint in source countries relative to competitors and a comprehensive list of client institutions in all destinations. We forecast Multi-Destination placement volumes to increase at a 32% CAGR FY16-20, with Multi-Destination accounting for ~4 of total placements by FY20 vs 23% in FY16. This would result in IEL managing the placement of ~3% of total inbound international students into Canada, New Zealand, the US and the UK in aggregate (vs just over 1% currently by our estimates). Figure 53: Multi-Destination volume forecasts 25 7 Figure 54: IEL 1H17 placement volume growth by destination % 36% % -29% FY14 FY15 FY16 FY17F FY18F FY19F FY20F MD Placement Volumes (000s) Reported growth Australia Canada New Zealand UK USA Source: Company data, Credit Suisse estimates Source: Company data (IEL.AX / IEL AU) 23

24 May 2017 IELTS testing times ahead? Volume growth impacted by competition Global IELTS volume growth has been strong; nearing maturity IELTS is the world's largest (by volume) and most widely accepted high-stakes English language test. It is the only test accepted by all border authorities that require an English language test for visa purposes although it does face competition in most markets. ~2.5 mn IELTS tests were taken in 2014, up from around 0.5 mn in 2003 (17% CAGR). Growth has been driven by increased migration to English speaking countries, higher visa requirements and expansion by both IEL and British Council of the number of testing locations. There are currently over 1,000 IELTS testing locations worldwide in more than 140 countries. The breadth of the current footprint suggests that the IELTS test is getting close to full penetration and that growth is likely to moderate towards something approaching overall migration growth (especially with some markets being opened up to competition). Overall IELTS volume CAGR of ~11% from represented an easing from 2 CAGR over the previous 5 year period. As of 2015, IEL had ~400 testing locations in 50 countries, with the remaining 600+ centres operated by BC. IEL administered 826k or 31% of the total IELTS volume in FY15, with BC administering the remaining 69% (~700k in China and ~1.15 mn elsewhere). Figure 55: IELTS tests per annum 2.5m 2.0m 1.5m Figure 56: IELTS test share by provider (FY15) China & JVs 26% IEL 31% 1.0m 0.5m 0.0m BC (ex China) 43% Source: Company data, Source: Company data International expansion offset by loss of Australian monopoly Asia increasingly dominates IEL's geographic split within its English Testing business, however Australasia still represented almost 3 of overall volumes as of FY15 and Australia remains an important market for IEL (although this is lessening over time as Australian volumes shrink and IEL expands into new geographies). After volumes fell in FY11 as a result of a tightening of visa restrictions in Australia, IEL's English Testing business grew at a 13% CAGR between FY12 and FY15 driven by a global expansion strategy which has seen IEL enter a number of new markets. Upon entering these markets IEL typically competes against both other tests (where accepted) and British Council in the delivery of IELTS. Recently entered markets include Japan and Nepal in 2H16 and Greece in 1H17. Volume growth tailed off to +4% in FY16 (and to +3% in 1H17) due to falling volumes in Australasia as a result of the Department of Immigration and Border Protection opening up the English language testing market to competition. This offset strong growth in newer markets including Nepal, Canada and the Middle East. (IEL.AX / IEL AU) 24

25 Figure 57: IEL-facilitated IELTS test volumes by region (FY15) Figure 58: IEL English Testing volumes RoW 27% Australasia 28% Asia 4 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Testing volumes (000s) Growth -1 Source: Company data Source: Company data, SEEK Prior to November 2011, IELTS was the only English language test accepted by DIBP in relation to visa applications. However, the Department has since expanded the list of approved tests to include Pearson Test of English (PTE), Test of English as a Foreign Language (TOEFL) and Certificate of Advanced English (CAE), the latter of which is produced by IELTS co-owner Cambridge Assessment. While IELTS is the most recognised brand name in the market, given that it started with a market share of 10 it has unsurprisingly seen a volume impact since the DIBP's decision (increasing over time as the other tests have become more established and widely accepted). Additionally, TOEFL and PTE are both offered in a computer-based format, enabling a faster turnaround (e.g. ~5 days for PTE vs ~13 for IELTS) and offering a greater degree of comfort for test-takers who may feel nervous being judged in person on their spoken English language skills. There is also anecdotal evidence that PTE in particular is considered less challenging than IELTS (possibly due to computer delivery). We estimate that Australasian IELTS testing volumes have been declining in the midteens in recent periods. The company is confident that its market share will begin to stabilise once the computer version of the test is rolled out from the second half of calendar 2017 (we estimate ~7 in FY16). Nonetheless, there is a risk of further market share erosion and we do not expect domestic volumes to return to growth in the foreseeable future, weighing on overall volume growth. Figure 59: Australasia IELTS test volumes H15 2H15 1H16 2H16 1H17 Australasia volumes (000s) Growth Figure 60: IELTS share of Australian high stakes English testing FY12 FY13 FY14 FY15 FY16 Source: Company data, Credit Suisse estimates Source: Department of Immigration and Border Protection, Company data, Credit Suisse estimates (IEL.AX / IEL AU) 25

26 Reliance on non-profit third parties a risk IEL doesn't produce the test or own it outright Although IEL is a "co-owner" of the IELTS test, it does not produce the test nor does it have exclusive rights to distribute it (although we note that it has typically been successful in competing against BC where it has chosen to do so). The test is produced by Cambridge Assessment, with IEL paying CA a fee per test equivalent to ~6 of the average test price. These payments account for almost half of IEL's total cost base. While IEL's gross margin has remained fairly stable we note that there is no long term contract in place, with the fee paid to CA negotiated annually. While the status quo clearly benefits both parties, there is no guarantee that CA won't look to amend the terms in a manner unfavourable to IEL in the future. Outside of economic concerns, there is also a risk that the other parties may not agree with IEL on matters such as content development, delivery mechanisms (e.g. computer-based testing) or operational and logistical concerns. This possibly played a role in the delay in producing a computer-based test relative to competitors. Finally, CA produces and distributes a competing test to IELTS (Certificate in Advanced English) which could constitute something of a conflict of interest in markets where the two tests compete (such as Australia). While we note that volumes for CAE are much smaller and it is less established than IELTS, this could still result in IEL and CA having conflicting objectives when it comes to expansion of IELTS. Figure 61: IELTS payments to Cambridge Assessment (A$m) Figure 62: IEL English Language Testing gross profit (A$m) $90m $80m $70m $60m $50m $40m $30m $20m $10m $0m 1H15 2H15 1H16 2H16 1H17 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $50m $45m $40m $35m $30m $25m $20m $15m $10m $5m $0m 1H15 2H15 1H16 2H16 1H A$ payments to CA Cost per test Gross profit (A$m) Margin (%) Source: Company data Source: Company data, SEEK China Agreement a significant contributor to group profit The China Agreement with British Council secures BC a monopoly position on the distribution of IELTS in China in return for payments to IEL (from BC) of 3-4% of the testing fee (A$12-16 per test). While the agreement can be terminated at 12 months' notice by either party (meaning that it is effectively renegotiated on an annual basis), the current structure has been in place since 2001 and the company does not currently expect any material changes on a go-forward basis. The China Agreement is a significant contributor to group profit. Tests administered by BC in China accounted for 26%, or ~650k, of total global IELTS tests in FY15. Assuming growth to ~800k tests administered in FY16, we estimate that the China Agreement contributed A$9-12mn of revenue in FY16, equivalent to 15-2 of group EBITDA (assuming minimal associated costs). Although there is no long-term contract in place, we note that the current arrangement benefits both parties, with BC maintaining a monopoly position in IELTS' largest market (IEL.AX / IEL AU) 26

27 and IEL receiving a near-10 margin revenue stream effectively in return for doing nothing. If the agreement were to be discontinued it would have a material adverse impact on IEL's short-term earnings, however IEL would then be free to compete against BC in China (something in which it has had success in other markets). As a result, our forecasts assume that the agreement is effectively renewed into perpetuity on similar terms and we expect that a future termination may in fact be more likely to be initiated by IEL (implying that such a change is expected to be value-accretive). Figure 63: IELTS tests by provider (FY15) China & JVs 26% BC (ex China) 43% IEL 31% Figure 64: Estimated annual revenue to IEL under China Agreement and share of EBITDA FY11 FY12 FY13 FY14 FY15 FY16 Revenue (A$m) % of IEL EBITDA 24% 2 16% 12% 8% 4% Source: Company data Source: Company data No long term contract for IELTS Termination of the IELTS examination agreement can be effected on 12 months notice by any one of the three partners to the agreement (IEL, British Council and Cambridge Assessment). The agreement does not specifically outline the consequences of termination, however unless the three parties agree that copyright in the materials, reports and publications and the test itself can be used by the parties following termination, it is likely that none of the partners would be able to use such rights. While maintaining the status quo benefits all parties, IEL's priorities may not always be aligned with BC and CA. CA runs a competing test while BC competes against IEL in most markets, and both are non-profit entities who thus may not be solely driven by economic aims. Outside of termination concerns, the unique ownership structure of IELTS and lack of a long term contract could also result in operational roadblocks where the parties do not agree with each other (e.g. computer-based testing, which has been slow to market relative to competing tests). IEL has agreed with its partners that if a competitor acquires >1 of IEL, CA and BC could continue to use all IP rights relating to IELTS in the event of termination (materially reducing the likelihood of a future takeover premium for IEL shareholders given the impact that this would have on IEL's business). Despite the lack of a long-term contract, we note that the existing commercial relationship dates back to Additionally, the lack of a clearly defined outcome should a termination be triggered makes it in all three parties' best interests to maintain the current working relationship. It is our expectation that the IELTS partnership as currently constituted will be maintained for the foreseeable future. Nonetheless, given the importance of the IELTS agreement to the wider group, future termination or adverse changes to the current arrangement remain a key risk in considering IEL as an investment. (IEL.AX / IEL AU) 27

28 Forecast modest long-term volume growth overall Expect continued volume declines in Australia, slowing growth overseas Our base case forecasts are for 4% overall volume CAGR FY16-20F, with solid overseas growth offset by volume declines in Australia driven by increased competition. We expect the decline in Australian volumes to moderate as IELTS' market share stabilises (benefiting from the introduction of computer-based testing and subsequent lower lead times for results). We model blended average fee growth in line with inflation and hold gross margins steady with the fee to CA remaining at around 6 of revenue. We do not forecast any step change in growth provided by IEL's entry into new markets. IEL has historically been successful in competing with BC, for example in the recent entry into Japan (~40k tests per annum overall). While there are currently around 90 countries in which BC operates that IEL does not, the majority of these are likely to be uneconomic for IEL to enter. Entry in to new markets would be incremental to growth, however in our view this is likely balanced by the threat of increased competition in some markets (e.g. acceptance of additional tests). There is a tail risk that the IELTS partnership is dissolved or amended in a manner adverse to IEL in the future. However, this is impossible to predict and thus we have made no allowance for this in our numbers. Likewise, we do not assume any change from the status quo in relation to the China Agreement with BC. Figure 65: Australasian forecast IELTS volumes Figure 66: RoW forecast IELTS volumes % 160-4% % -12% % 6% 4% 40-16% 150 2% 0 FY16 FY17F FY18F FY19F FY20F -2 0 FY16 FY17F FY18F FY19F FY20F Testing volumes (000s) Growth Testing volumes (000s) Growth Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (IEL.AX / IEL AU) 28

29 English Teaching and Hotcourses Logical adjacencies for IEL English Teaching IEL owns and operates ten English language schools in South East Asia. The first school opened in Thailand 1989, with the company entering Cambodia in 1992 and Vietnam in IEL delivered tuition to just under 70,000 students in FY16. Courses offered by IEL range from short courses (~20 hours duration for preparatory purposes) up to four years of part time study for students seeking to obtain an upperintermediate level of general English. The majority of teaching content is proprietary and delivered by IEL staff although in Vietnam the company also utilises curriculum content provided by a third party (for which the third party is entitled to a profit share). IEL's English Teaching business is exposed to similar macro trends as its other businesses, namely the predominance of English as a global language. There is also some synergy with the other two divisions as prospective IELTS candidates and/or future international students may need to first improve their English language skills. Student volumes increased 24% in the first half of FY16 due to strong demand growth and the opening of a new campus in Cambodia. However, this has since moderated to midsingle digit volume growth over the last two halves as the benefit from that increase in capacity has largely flowed through. Average student fees in AUD fell 7% in the first half of While this partially reflects currency headwinds, the company said that average fees on an underlying basis fell 3% due to mix shift, however overall fee levels remain stable. Figure 67: English Teaching student volumes H15 2H15 1H16 2H16 1H Figure 68: English Teaching average student fee % 300 9% 250 6% 200 3% % 50-6% 0-9% 1H15 2H15 1H16 2H16 1H17 Student Volumes (000s) Growth Average tuition fee (A$) Growth Source: Company data, SEEK Source: Company data, SEEK Revenue growth has moderated over the past two halves alongside the pullback in volume growth and lower average course fees in 1H17. We understand that new campuses typically have not taken long to 'fill up' due to the strong (and growing) demand for English language skills in IEL's markets, suggesting further upside should IEL open further locations. Upside from potential new schools is not captured in our current numbers, which call for 7% revenue CAGR FY17-20F (we forecast flat revenue in FY17 due to currency headwinds). We expect solid continued growth due to the ongoing demand for English language skills in South East Asia, and view English Teaching as a good strategic fit next to IEL's major divisions. Additionally, we understand that despite being a people intensive business the English language schools have healthy margins with students paying in USD. However, we note that English Teaching contributes less than 6% of total group revenue and as a result do not view it as a major driver of returns or share price performance for IEL. (IEL.AX / IEL AU) 29

30 Figure 69: English Teaching revenue growth Figure 70: English Teaching gross profit $12.5m 4 $8m 8 $10.0m 32% $7m $6m 7 6 $7.5m $5.0m 24% 16% $5m $4m $3m $2.5m 8% $2m $1m 2 1 $0.0m 1H15 2H15 1H16 2H16 1H17 2H17F $0m 1H15 2H15 1H16 2H16 1H17 Revenue (A$m) Reported Growth Underlying Growth Gross Profit (A$m) GP Margin (%) Source: Company data, Credit Suisse estimates Source: Company data, SEEK Hotcourses: Makes sense as a lead generator and a natural hedge IEL announced in January 2017 that it had acquired the UK-based online education search business Hotcourses for 30m ex-cash. Hotcourses, which generated revenue of 10.7mn (A$17.5mn at current exchange rates) in FY16, is the world's largest online educational course database. Hotcourses' network of websites lists ~600k courses from almost 1,000 educational institutions and had over 60mn visits in Over 9 of revenue is from institutions in IEL's target markets of UK, USA, Australia, Canada and New Zealand. Hotcourses' core business generates revenue from both lead generation and advertising products. We view this as a natural fit for IEL alongside its Student Placement business, providing lead generation for IEL's agencies while providing Hotcourses with an expanded partner institution network outside of the UK. Additionally, the acquisition allows IEL to generate revenue from a digital student engagement channel that could potentially erode the physical agency share of the international student placement market by making direct entry more straightforward. At the time of acquisition IEL indicated that Hotcourses is profitable, with EBITDA margins of over 2 (implying an acquisition multiple of <14x EBITDA). Hotcourses: Digital agency could be a difference maker In addition to its core business, Hotcourses in 2015 established a 'virtual agency' model in India that placed over 400 international students last year. In addition to potentially disrupting the physical agency model, virtual agencies are likely to have materially higher incremental margins. IEL is well-placed to drive growth within the digital agency business and potentially deploy the concept in other source countries, providing a natural hedge against disruption of its physical agency business and upside to its overall agency market share. (IEL.AX / IEL AU) 30

31 Historical financials and estimates Earnings drivers and historical performance Revenue IEL's revenue increased 17% to $362mn in FY16, although this slowed to growth in 1H17 due partly to currency headwinds (+9% on a constant currency basis). IEL's FY12-16 revenue CAGR of 1 reflects strong growth across all businesses, particularly Student Placement. Revenue growth over a longer period has been less consistent with a CAGR of only 2% across FY09-12, largely because of adverse regulatory changes in Australia surrounding visa restrictions and post-work study rights. IEL's main revenue streams are: English Testing (66% of FY16 revenue): Revenue is generated by distribution of the IELTS test is driven by total test volumes across IEL's network and the average test fee (~A$270 in 1H17). Volumes in Australasia (28% of total in FY15) has been negatively impacted by the loss of IELTS' monopoly in Australia, however offshore growth has been sufficient to drive 13% English Testing revenue CAGR over the past four years (although growth slowed to +7% on a constant currency basis and +2% reported in 1H17). IEL also receives a fee per test delivered in China by British Council under the China Agreement equivalent to 3-4% of the test fee. Student Placement (26% FY16 revenue): IEL generates fees from its partner institutions from the successful placement of students into courses. Fees are set at a proportion of the first year's tuition (typically ~12%). Prior to 2010, IEL only placed students into Australian institutions, however it has since expanded to add client institutions in other English language destination countries (which it terms "Multi- Destination"). Student Placement revenue grew 33% in FY16 driven by 101% growth in Multi-Destination revenue and 17% growth in Australian placements revenue. This slowed to 11% growth in 1H17 due to f/x (+17% constant currency) and a higher base of comparison in Multi-Destination. English language teaching (6% of FY16 revenue): Teaching revenue is driven by the number of courses taken and the fees charged to students at IEL's schools in South East Asia. Teaching revenue grew 2 off a low base in FY16 however this slowed to +4% on a constant currency basis in 1H17 (flat including f/x headwind). Figure 71: Historical revenue by segment (FY12-16) $400m $350m $300m $250m $200m $150m $100m $50m $0m FY12 FY13 FY14 FY15 FY16 1H16 1H17 Figure 72: Historical group revenue and growth $400m $350m $300m $250m $200m $150m $100m $50m $0m FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY English Testing Student Placement English Teaching Other Revenue (A$m) Growth Source: Company data Source: Company data, SEEK Costs and earnings COGS: ~8 of IEL's direct costs relate to the fee payable to Cambridge Assessment for the IELTS test, which is paid on a fee per test basis and broadly scales with (IEL.AX / IEL AU) 31

32 revenue over time (subject to currency movements as the fee is set annually in GBP but IEL earns revenue in various currencies). COGS within the Student Placement business sit at around 1 of revenue and reflect agent commissions paid on successful placements. Gross margin for the group has improved from 49% in FY15 to 54% in 1H17 due largely to the faster growth in the higher margin Student Placement business. Figure 73: Historical COGS by segment $200m 48% $180m 51% 49% $160m $140m $120m $100m $80m $60m $40m $20m $0m FY14 FY15 FY Figure 74: Historical gross profit margin by segment 9 86% % 68% 66% 6 51% 49% 52% % FY14 FY15 FY16 Testing Placement Teaching Other COGS % of Sales Testing Placement Teaching Group Source: Company data Source: Company data Employee costs: IEL's businesses are relatively service-intensive. As of November 2015 IEL had just under 1,700 employees worldwide, with the vast majority (~8) in Asia and around 7 within Student Placement directly or in "network management". The average salary was around A$45k in FY16 and employee expenses currently sit at around 22% of group revenue. Occupancy expenses: IEL maintains a network of ~90 offices in over 30 countries for the Student Placement business alone, however total occupancy expenses are relatively modest at ~4% of revenue. Promotion and publicity costs: Includes costs relating to global and local marketing campaigns (including at student fairs etc.) for the IELTS and brands. As IEL operates largely on referrals marketing costs are not particularly high at around 3% of sales. Other costs: Overheads and unallocated costs sit at around 6% of revenue. Figure 75: Historical opex & growth Figure 76: Historical EBITDA and margin $140m 28% $70m 28% $120m 24% $60m 24% $100m 2 $50m 2 $80m 16% $40m 16% $60m $40m $20m 12% 8% 4% $30m $20m $10m % 8% 4% $0m FY13 FY14 FY15 FY16 $0m FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Opex (A$m) Growth EBITDA (A$m) Margin Source: Company data Source: Company data, SEEK (IEL.AX / IEL AU) 32

33 Earnings forecasts Revenue Student Placement: We forecast 1 FY16-20F revenue CAGR driven by p.a. volume growth in placements into Australia and a 32% CAGR in Multi-Destination placements, with yield expansion slightly above CPI in line with typical course fee growth. Under our base case forecasts Multi-Destination accounts for 4 of total volumes by FY20. English language testing: We expect volume declines in Australia to moderate as IELTS' market share stabilises (partly due to the rollout of the computer-based alternative), with 4% total FY16-20F volume CAGR driven by continued expansion in overseas markets and solid demand growth. Factoring in modest blended fee growth this drives base case revenue growth of around 6% p.a. through FY20. As with Student Placements FY17F growth is artificially depressed by the strengthening of the AUD. Figure 77: Student Placement revenue forecasts $175m 3 Figure 78: English Testing revenue forecasts $300m 12% $150m 3 $250m 1 $125m $100m $75m $50m $200m $150m $100m 8% 6% 4% $25m $50m 2% $0m FY16 FY17F FY18F FY19F FY20F $0m FY16 FY17F FY18F FY19F FY20F Revenue (A$m) Growth Revenue (A$m) Growth Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates English language teaching: We forecast revenue CAGR in English Teaching through FY20 (+7% on a constant currency basis). Our forecasts do not include the opening of any new campuses which would be incremental to growth. Group: Our base case forecasts are for 9% group revenue CAGR over the FY16-20F period, or +11% excluding adverse currency movements. We view Student Placement as the major driver of variance to our forecasts due to possible influence of external factors and outsized impact on the bottom line (predominantly fixed cost base). Figure 79: English Teaching revenue forecasts Figure 80: IEL group revenue forecasts $30m $25m $20m $15m $600m $500m $400m $300m $10m $5m 1 $200m $100m $0m FY16 FY17F FY18F FY19F FY20F $0m FY16 FY17F FY18F FY19F FY20F Revenue (A$m) Growth English Testing Student Placement English Teaching Other Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (IEL.AX / IEL AU) 33

34 Earnings Gross profit margin to creep up: We expect a ~300bp improvement in gross margins over the FY16-20F period due to the change in revenue mix away from the lower growth English Testing business towards Student Placement. We do not expect any material change in underlying gross margins within individual businesses as agent commissions and the fee per IELTS test paid to CA which form the majority of COGS are variable in practice. 14% FY16-20F EBITDA CAGR: Our base case FY20F EBITDA forecast is for 14% FY16-20F CAGR to $104mn, driven by: (i) top-line growth; (ii) shift in mix towards higher margin Student Placement business; (iii) modest reduction in human capital requirements from computerisation of IELTS test and virtual agency model in Student Placements; and (iv) general economies of scale on SG&A. Figure 81: IEL gross profit forecasts Figure 82: IEL group EBITDA forecasts $300m $250m $200m $150m $100m $50m $120m $100m $80m $60m $40m $20m % 24% 2 16% 12% 8% 4% $0m FY16 FY17F FY18F FY19F FY20F $0m FY16 FY17F FY18F FY19F FY20F English Testing Student Placement English Teaching Other EBITDA (A$m) Margin Source: Company data Source: Company data, IBES, Credit Suisse estimates (IEL.AX / IEL AU) 34

35 Figure 83: IEL summary financials and key operating metrics FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY20F KPIs English Testing Test Volumes (000s) Average Fee (A$) Student Placements Australia (000s) n/a Multi-Destination (000s) n/a Total Placements (000s) Average Fee (A$) 2,333 2,397 2,603 2,943 2,907 3,002 3,097 3,194 English Teaching Student Volumes (000s) n/a n/a Average Fee (A$) n/a n/a P&L Revenue English Testing Student Placement English Teaching Other Total Revenue Growth English Testing -1% 18% 21% 11% 2% 7% 6% 6% Student Placement 4% 2 21% 33% 14% 19% 1 11% English Teaching n.m. 22% 2 2 8% 7% 6% Total Growth n.m. 18% 21% 17% 8% 13% 9% 7% COGS (107.9) (124.8) (157.2) (173.2) (183.3) (204.4) (219.5) (233.9) Gross Profit Gross Margin 5 51% 49% 52% 53% 54% 54% 5 Opex (77.2) (89.4) (102.0) (127.4) (138.7) (155.5) (166.6) (177.8) Total Costs (185.0) (214.2) (259.2) (300.6) (322.0) (359.9) (386.2) (411.6) EBITDA EBITDA Margin 1 17% 16% 17% 18% 19% 2 2 D&A* (6.4) (6.9) (6.6) (7.4) (5.9) (8.5) (10.0) (10.8) EBIT Net Interest PBT Tax (9.4) (10.7) (13.9) (14.2) (18.6) (22.4) (25.4) (28.1) NPATA Cash Flow EBITDA Changes to NWC (3.1) Tax, Interest & Other (14.2) (16.6) (22.0) (25.0) (27.6) Operating Cash Flow Capex (9.2) (11.4) (13.3) (12.0) (12.9) Other 0.0 (39.9) (12.5) Investing Cash Flow (9.2) (51.3) (25.8) (12.0) (12.9) Financing Cash Flow (50.4) (29.4) (37.6) (43.8) (48.8) Total Cash Flow (15.8) (26.4) (1.4) Free Cash Flow Growth 2 13% 2 1 Source: Company data, Credit Suisse estimates (IEL.AX / IEL AU) 35

36 Key risks Downside risks Adverse regulatory changes: IEL's business is heavily reliant on the volume of international students attending institutions in Australia and other host countries (UK, USA, New Zealand, and Canada). Material changes to immigration policy, student visa requirements or other regulatory changes that alter the attractiveness and viability of IEL's destination countries could have a direct adverse impact on student placement volumes and IELTS test volumes. Examples of possible changes include quotas, changes in documentation requirements, increased qualification thresholds, delays in approvals or fee increases. Adverse change to or dissolving of IELTS partnership: English Language Testing through administration of the IELTS test was responsible for 66% of IEL's group revenue in FY16. The IELTS test is jointly owned by Cambridge Assessment (which develops the test), British Council and IEL (who administer it) under a rolling agreement that can be terminated at 12 months' notice by any party. If the agreement were to be terminated, IEL would no longer be able to operate its English Language Testing business. Adverse change to or dissolving of the China Agreement: IEL receives a fee per test from British Council in return for not competing with BC in the distribution of IELTS in China. The agreement can be terminated on 12 months' notice by either party. We estimate that the China Agreement contributed ~15-2 of group EBITDA in FY16. Increased competition in English Testing: IELTS competes with a number of other competing tests including PTE, TOEFL and CAE (administered by IELTS co-owner Cambridge Assessment). IELTS previously had a monopoly in the Australian market (until late 2011), however this is no longer the case. Additionally, IEL and British Council compete in some markets in the delivery of IELTS. Increased competition in Student Placement market: The student placement market is highly competitive in relation to both attracting prospective students and forming relationships with desirable higher educational institutions. Increased competition in either source countries (students) or destination countries (partnerships with institutions) could adversely affect placement volumes and/or commission levels. Technological changes: Advances in technology and increased availability of information and services online could erode the competitive advantage of physical agency networks in international student placements and increase the proportion of direct entrants or virtual agencies, adversely affecting IEL's placement volumes. Virtual classrooms: Online courses or pathway programs affiliated with partner institutions could in the future allow prospective international students to begin their tertiary education in their home countries, resulting in lower outbound student migration and reduced demand for student placement services. Macro risks: The international student marketplace is sensitive to changes in global macroeconomic conditions. Enrolments are particularly dependent on the economic environment within source countries, as evidenced by a fall in outbound student mobility from Asia during the 1998 Asian economic crisis and subsequent strong growth from China and India before weakness during the global financial crisis. Source country attractiveness: International students desire to attend university in a particular country is heavily influenced by their perception of that country. Concerns in source countries that geographies in which IEL operates (particularly Australia) are unwelcoming or unsafe to foreigners are likely to negatively impact student numbers. (IEL.AX / IEL AU) 36

37 An example is the student safety warning given by the Chinese Foreign Ministry following highly publicised attacks on Indian and Chinese students in Australia in Reliance on third parties: IEL's operations rely to an extent on a network of third party agents, licensees and other third parties (particularly IELTS testing). Many of these agreements are non-exclusive, with no fixed term and can be renegotiated or terminated. Additionally, IEL's Student Placement business in China has historically been reliant on arrangements with local entities as IEL did not hold a student recruitment licence in the country. Currency risk: IEL generates revenues and incurs costs in many different currencies. Its most significant foreign exchange exposure is to the British Pound (the currency in which its payments to Cambridge Assessment for the IELTS test are denominated). The company uses hedging to assist with managing f/x risk, however a prolonged strengthening of the GBP could still adversely impact financial performance. Additionally, movements in currencies of key source and destination markets could impact student placement volumes. Ownership structure: Education Australia, a consortium of 38 Australian Universities, founded IEL and holds 5 of the shares. Education Australia can therefore exert a significant degree of influence over the company s management and strategy and the approval of significant corporate transactions. Additionally, we note that as part of the IELTS partnership agreement Education Australia has agreed with the British Council and Cambridge Assessment that it will not dispose of its shares in IEL without their consent, reducing the chances of any future control premium being received for IEL shares. Upside risks Beneficial regulatory changes: Regulatory changes that make migration and student visas more plentiful and/or obtainable in destination countries would likely be beneficial for volume growth in Student Placement and English Testing. Student Placement market share upside in China: Recent deregulation of the Chinese international student counselling industry could enable IEL to recruit students directly without need for the use of local partners or VIEs, potentially driving increased market share and higher Student Placement volumes. Improvement in IELTS' competitive position: Anecdotal feedback suggests that computer-based tests such as PTE are considered 'easier' by many applicants than IELTS. This could lead institutions to prefer IELTS candidates, increasing market share. Additionally, the launch of a computer-delivered version of IELTS should remove a competitive disadvantage relative to some other tests. Vertical integration in China: The partial deregulation of the Chinese student placement agency marketplace could allow IEL to offer additional value added services to prospective Chinese students, driving upside in both volumes and average fees per student. Changes to the China Agreement: If the China Agreement was not renewed on expiry, this would have an immediate adverse impact on IEL's financials. However, it would also enable IEL to compete against British Council in distribution of IELTS testing in China, potentially leading to longer term upside. Beneficial currency moves: A long-term weakening of the GBP could potentially increase IEL's gross margins in English Testing due to lower A$ fees being paid to Cambridge Assessment. (IEL.AX / IEL AU) 37

38 Valuation and target price UNDERPERFORM, A$4.00 target price We use a discounted cash flow (DCF) as our primary valuation methodology for IEL, with relative P/E used as a cross-check. Our base case DCF for IEL results in an EV of A$1 billion and an equity value of $4.00 per share, and is based on the following inputs: FY16-25F revenue growth CAGR of ~8%; Terminal EBITDA margins of 22%; Long-term capex to sales of ~2% Normalised tax rate of 3; WACC of 1; and Terminal growth rate of 3% Our valuation is supported by our view that IEL should trade at a premium to its closest listed comparable NVT. At our $4.00 target price, IEL would trade on 22x FY17F P/E, a ~1 premium to NVT. IEL has outperformed NVT on an operational basis in recent years and NVT will always face the risk of further contract losses. However, we view the current >3 spread (on a FY17F P/E basis) as too wide given similar underlying macro and regulatory exposures. We also note that IEL's placement volumes were more heavily impacted than NVT's Australian enrolment numbers under the restrictive visa regime during the period and contractual tail risk in English Testing. We set our $4.00 target price for IEL in line with valuation, resulting in an UNDERPERFORM rating. IEL has a solid growth outlook and is currently benefiting from strong underlying industry fundamentals. However, we view potential catalysts (loss of share in English testing, tighter visa and/or immigration requirements in destination countries, changes to the IELTS and/or China agreements) as skewed to the downside at current levels. 27x FY17F too steep given potential risks IEL has traded strongly since IPO, with the current FY17 P/E multiple of ~27x consensus above the average since listing of 25x. We note that the trading range over the past 18 months is well above the multiple at the offer price of 19x, in line with where NVT was trading at the time. At our $4.00 target price, IEL would trade on 22x P/E, a ~1 premium to NVT and in line with domestic global services names and global education comps. (IEL.AX / IEL AU) 38

39 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 3 May 2017 Figure 84: IEL P/E since IPO Figure 85: FY17F P/E relative to peers 30x 28x 26x 24x 22x 20x 18x 16x 14x 12x 10x IPO at 19x P/E IEL PE NVT PE 27x 22x 20x 32x 27x 25x 15x 15x 16x 36x 26x 26x 14x 16x 12x Source: Company data, Credit Suisse estimates, I/B/E/S Sensitivity analysis Source: Company data, Credit Suisse estimates, I/B/E/S. Note: Calendarised for a June year end. IEL's long-term estimates and valuation are highly sensitive to assumptions regarding international student migration (including any impact from political or regulatory changes), IEL's share of international student placements across its source/destination countries and the impact of competition on the IELTS English language test both in Australia and abroad. We have thus looked at the sensitivity of our valuation to underlying assumptions regarding these factors, with a particular focus on student placement volumes as we view this as the highest variance input in valuing IEL. These scenarios give a valuation range for IEL of A$2.80 to A$5.05 per share. Growth in adjacent areas (particularly value-added services in China and digital services such as the virtual agency model) could add incremental value, however we have not explicitly quantified that upside at the current time. (IEL.AX / IEL AU) 39

40 Figure 86: IEL base case, blue sky and grey sky assumptions International student migration assumptions Student Placement assumptions IELTS assumptions Base Case Grey Sky Blue Sky international student commencement growth in Australia (FY17-20F) weighted average international student commencement growth across IEL s other markets No change in Australian market share FY16-20F volume CAGR in Australia 32% multi-destination volume CAGR 1 FY16-20F revenue CAGR 3% p.a. volume decline in Australia FY17-20F 6% volume CAGR offshore 6% FY16-20F revenue CAGR decline in international student commencements in Australia (FY17-20F) weighted average international student commencement growth across IEL s other markets ~1 reduction in agency usage and/or IEL share of placements - FY16-20F volume CAGR in Australia 2 multi-destination volume CAGR FY16-20F revenue CAGR 1 p.a. volume decline in Australia FY17-20F volume CAGR offshore 3% FY16-20F revenue CAGR 1 international student commencement growth in Australia (FY17-20F) 1 weighted average international student commencement growth across IEL s other markets Increase in IEL market share due to China expansion and/or success of virtual agency model 12% FY16-20F volume CAGR in Australia 4 multi-destination volume CAGR 23% FY16-20F revenue CAGR Flat volumes in Australia 8% volume CAGR offshore 7% FY16-20F revenue CAGR 2020F revenue $516m (9% FY16-20F CAGR) $445m ( FY16-20F CAGR) $590m (13% FY16-20F CAGR) 2020F EBITDA $105m (14% FY16-20F CAGR) $78m (6% FY16-20F CAGR) $132m (21% FY16-20F CAGR) Valuation $4.00 per share $2.80 per share $5.05 per share Source: Company data, Credit Suisse estimates Peer comparison Limited direct comps but IEL is trading at a significant premium IEL's closest domestically listed peer is NVT. While not a direct comparable, it is the most relevant to IEL given similar leverage to global international student flows. Although NVT has de-rated several times in recent years due to contract losses, we note that IEL's growth has also historically gone through peaks and troughs due to factors often outside of the company's direct control. As a result, although IEL has a stronger track record of growth than NVT in recent years we would question whether the current ~3 premium on a FY17F PE basis is justified (note we also rate NVT as UNDERPERFORM). We have also looked at IEL's valuation in comparison to a basket of globally focused services businesses listed in Australia and global education businesses. While these comps provide a useful reference point, differences in scale, geographic footprint and macro exposure limit direct relevance for IEL. At our $4.00 target price, IEL would trade in line with this basket of stocks on 16x FY17F EBIT. (IEL.AX / IEL AU) 40

41 Figure 87: Global education and domestic global growth peers Share Mkt Cap CS Coverage EV/EBITDA EV/EBIT P/E FY17F June Y/E Price A$mn Rating TP FY16A FY17F FY18F FY16A FY17F FY18F FY16A FY17F FY18F Growth Australia / NZ Education Limited $4.65 1,164 UNDERPERFORM $ x 16.9x 14.0x 21.7x 18.5x 15.6x 29.8x 26.7x 23.0x 8. Navitas Ltd $4.60 1,651 UNDERPERFORM $ x 11.4x 11.5x 13.5x 14.4x 15.0x 19.1x 19.9x 19.6x -5.1% Average 15.0x 14.2x 12.8x 17.6x 16.4x 15.3x 24.5x 23.3x 21.3x 1.4% Domestic global services Ainsworth Game $ x 8.2x 6.6x 9.8x 12.1x 9.3x 10.9x 14.8x 12.1x 1. Breville Group $ ,378 OUTPERFORM $ x 14.9x 13.7x 17.9x 16.7x 15.4x 27.4x 25.4x 23.3x 3. Corporate Travel $ , x 21.6x 17.0x 35.8x 24.8x 18.9x 41.1x 31.9x 25.4x 28.7% Flight Centre $ ,249 OUTPERFORM $ x 6.2x 5.8x 6.9x 7.6x 7.3x 13.2x 15.1x 14.4x 1.7% IRESS $ ,089 OUTPERFORM $ x 18.3x 15.9x 25.7x 21.8x 18.6x 32.7x 26.9x 23.4x 10. OFX Group $ x 7.7x 6.1x 7.7x 9.6x 7.8x 15.3x 16.3x 13.1x 4.3% Average 14.4x 12.8x 10.9x 17.3x 15.4x 12.9x 23.4x 21.7x 18.6x 8.3% Global Education Pearson ,992 NEUTRAL x 8.9x 8.9x 9.3x 10.6x 11.4x 9.9x 11.8x 12.1x 1.4% New Oriental Education $ ,390 OUTPERFORM $ x 27.2x 21.2x 44.4x 32.7x 24.8x 44.9x 36.3x 27.3x 21.1% DeVry Education $ , x 7.7x 7.2x 11.5x 11.1x 9.9x 15.8x 14.3x 13.4x -0.7% APEI $ x 3.7x 4.4x 4.1x 5.6x 7.6x 11.6x 15.7x 22.0x -6. Caplla Edctn $ , x 10.4x 9.9x 14.0x 13.7x 12.9x 27.9x 26.4x 25.2x 1.8% Strayer Educ $ , x 10.5x 9.1x 13.4x 13.4x 11.2x 25.9x 26.4x 22.6x 3.4% Average 12.6x 11.4x 10.1x 16.1x 14.5x 13.0x 22.7x 21.8x 20.4x 3.4% Total Average 13.8x 12.5x 10.9x 16.9x 15.2x 13.3x 23.3x 22.0x 19.8x 5.1% Source: Company data, Credit Suisse estimates for covered companies, I/B/E/S. Note: Calendarised for a June year end. HOLT valuation HOLT is an advanced corporate performance, valuation and strategic analysis framework for the benefit of Credit Suisse and its clients. Corporate performance is calculated in terms of our Cash Flow Return on Investment (CFROI ) metric. This provides a unique perspective on valuation issues that result from strategic decisions driven by corporate management. We believe the HOLT methodology helps identify valuation insights about a company quickly and easily, saving time and wasted effort. HOLT s default model initially uses consensus estimates to drive CFROI forecasts, before proprietary algorithms determine the rate of fade towards the long run average (the rate of this fade is a function of the level and volatility of returns and the rate of growth). Put simply, HOLT takes accounting information, converts it to cash, and then values that cash. This brings valuation back to basics at a time when differing / revised accounting practices are moving further away from commercial realities. From our perspective, a company s ability to deliver strong, sustainable and preferably increasing free cash flows is what matters. It is sustainable free cash that ultimately should drive the share price, longer term. Our approach takes away all the accounting anomalies and those so-called (and seemingly consistent) one-offs where accountability is not taken by many. Applying key Credit Suisse Research analyst estimates through our HOLT framework results in an A$4.11 valuation for IEL. This valuation initially uses ten years of key analyst estimates to drive CFROI forecasts, before proprietary algorithms determine the rate of fade towards the long-run average CFROI (6%). The HOLT valuation of A$4.11 supports our Underperform recommendation on the stock. Link to HOLT Lens scenario: (IEL.AX / IEL AU) 41

42 Figure 88: IEL HOLT valuation summary Source: Company data, Credit Suisse estimates, HOLT (IEL.AX / IEL AU) 42

43 Environmental, Social, Governance No material ESG concerns We do not apply any ESG discount to our valuation and/or Target Price for IEL. The most significant potential ESG concerns relating to IEL are its ownership structure and exposure to potentially harmful changes in immigration policy and visa laws. We discuss these issues in more depth in the below sections. Environment issues IEL is an education provider, course broker and administrator of English proficiency exams with limited environmental footprint. In our view there are no material environmental issues facing IEL. Social issues International education is heavily exposed to immigration policy in host countries. Political forces that lead to a tightening of immigration policy and visa laws could have a negative knock-on effect to international student inflows. Conversely, more open immigration policy and relaxed visa laws could increase international student numbers. An example of the industry s sensitivity to immigration policy was in 2009 when the Australian Government set new limits on skilled migration and enacted more stringent rules on visa applications (including student visas). In our view there is a possibility of adverse regulatory changes in the near to medium term in IEL's destination markets due to prevailing political conditions, however we view this as an operational concern and thus do not apply an explicit ESG discount (although we use a higher WACC for IEL than some other companies under our coverage). Tertiary education is subject to significant government regulation. This includes fee structures, accreditation of private providers and other incentives (or disincentives) for universities to pursue international students. We view regulatory risk overall as weighted towards the downside, and highlight the negative flow on effects caused by the measures taken by the Australian Government in 2009 on successful student visa application volumes (and thus placement volumes for IEL). In a worst case scenario, adverse regulatory changes could lead to a significant reduction in IEL's student placement volumes and also result in a decline in English testing volumes. Brand and reputational damage. The inherent success of the IELTS testing business in particular is built on integrity and security, particularly surrounding the supervision of examination applicants and the reliability of results and the quality of applicants within Student Placement. In , it was found a staff member at Curtain University in Western Australia was falsifying IELTS results and subsequently pleaded guilty to charges of bribery. The resulting actions led to Curtin University shutting down its IELTS testing facility. This facility was not owned by IEL nor was the culpable individual employed by IEL, however incidents such as this have the ability to negatively affect perception of IEL's services. Although we recognise this potential risk, we currently view it as well managed. Country reputation. Perception of IEL's destination countries within Student Placements (particularly Australia) could negatively impact student migration volumes. For example, a number of highly publicised attacks involving foreign students played a role in suppressing international student enrolments into Australia during the period. (IEL.AX / IEL AU) 43

44 Governance issues We highlight the ownership structure of IEL as a key governance issue. Education Australia, the collective body of 38 universities across Australia, owns 5 of IDP Education. The constitution states that until Education Australia ceases to hold less than 1 of voting power, the board of IEL is to be comprised of Directors who are Independent or representatives of Education Australia. The board structure provides Education Australia with significant influence regarding management, business strategy and corporate transactions and its interests may not necessarily be aligned with other shareholders. As part of the IELTS partnership agreement Education Australia has agreed with the British Council and Cambridge Assessment that it will not dispose of its shares in IEL without their consent. This potentially reduces the probability of any future control premium being received for IEL shares. Remuneration Modest base salary for CEO: CEO Andrew Barkla s base salary is set at $800k per annum. STI target 5 of base, one-off bonus for IPO: Mr. Barkla may be entitled to receive a maximum of $400,000 in a mix of cash and Service Rights Awards each financial year. The value of any STI payments will be determined based on achievement against the targets set and approved by the Nomination and Remuneration committee. In addition, a $200,000 one off cash bonus was paid to Mr. Barkla following the company s listing on the ASX. LTI target 5 of base: Mr. Barkla may be eligible to a LTI award up to a maximum $400,000 each financial year, noting that the vesting of those awards is dependent on the satisfaction of the applicable vesting conditions. 4.15m option awards received upon listing: In addition to Mr. Barkla s sign on arrangements, he was also granted 4,150,000 Option Awards with an exercise price of $1.44 for each option. These options will vest on 31 August 2018 and consist of 3 tranches of approximately 1,383,361 options each. These options will only vest if IEL meets applicable performance conditions, however as noted immediately below it appears highly unlikely that they would not do so. ~2 of shareholders voted against the company's remuneration report at last year's AGM, with an article in the Australian stating that they viewed Mr Barkla's options grant as overly generous. Hurdles for performance rights set well below expectations: While we view IEL's overall executive compensation package as appropriately aligning management's incentives with shareholders, we note that the disclosed hurdles for performance rights appear out of step with the company's recent results. 10 of performance rights will vest at a FY15-18 NPAT CAGR of 6% (5 vesting at a 5-6% CAGR, nothing below CAGR). IEL delivered FY15 NPAT growth of 22% and at the time of listing was guiding to FY16 NPAT growth of 17%, well in excess of the growth rate required for management's performance options to vest. IEL ultimately delivered 32% NPAT growth in FY16 and consensus is for 1 FY16-18 CAGR. Board Board size is within optimal size range: Based on our analysis in a previous note published here, we have found board sizes of between six to eight members for companies below A$5bn market capitalization have out-performed companies with both smaller and larger boards over IEL has seven board members and a market cap of ~A$1.1bn. (IEL.AX / IEL AU) 44

45 Figure 89: IEL board summary Board contains plenty of financial experience (including M&A and accounting) and a modest amount of educational industry experience. There is a potential lack of legal experience across the board considering IEL operates in highly regulated industries. Board tenure relatively short: We ideally look for average tenures of 4-6 years. However, we note that IEL was until recently a JV between SEEK an Education Australia prior to it being listed in November Gender diversity: Only two of the seven person board is female, below the 3 ASX threshold (by 2018). All directors appear to have appropriate workloads: All directors have more than 30 days per formal appointment. We count a chairmanship as equivalent as two appointments due to the higher workload involved. We base our analysis on publically available information in the company's annual report. Tenure Former ASX200 Fees / pay Other Name Position (Years) Financial Legal Tech CEO Board exp. Independent ($'000) directorships Peter Polson Non Exec Chair 10 X X X X $185 6 Andrew Barkla CEO & MD 2 X $1,027 - Ariane Barker Non Exec 3 X X $130 - David Battersby Non Exec 6 $115 2 Belinda Robinson Non Exec 1 X $115 2 Greg West Non Exec <1 X X $115 2 Chris Leptos Non Exec 1 X $115 5 Source: IEL prospectus Analyst views and valuation impact TP ESG Risk: We do not apply any ESG discount to our valuation at this time as in our view the highlighted social risks are adequately captured in operating expectations for the business. (IEL.AX / IEL AU) 45

46 Appendices Board and Management Board of directors Peter Polson, Non-Executive Director & Chairman: Mr Polson was appointed as a Non-Executive Director at in Mach 2007, having previously been the Managing Director of the Colonial Group and an executive with the Commonwealth Banking Group. He has extensive financial services experience, and is currently the Chairman of Challenger Limited, Challenger Life Company Limited, Avant Group Insurance Limited and Very Special Kids. Peter is also a Director of Avant Mutual Group Limited and Avant Group Holdings. Andrew Barkla, CEO & Managing Director: Mr Barkla was appointed as Chief Executive and Managing Director of in August Prior to joining the company, Andrew served as President of Australia and New Zealand at SAP. He has an extensive background in the technology, services and software industries, and has held various roles and responsibilities at Unisys, Unisys West and PeopleSoft. Ariane Barker, Non-Executive Director: Ms Barker was appointed as a Non- Executive Director at at the completion of its IPO in November She has an extensive background in international finance. She currently heads the Products and Markets division at JBWere and is a member of the Murdoch Children s Research Institute (MCRI) Investment Committee and Development Board. Ariane is Chair of the Audit and Risk Committee and is a graduate of the Australian Institute of Company Directors (AICD). Professor David Battersby AM, Non-Executive Director: Mr Battersby was appointed as a Non-Executive Director in February He is currently the Vice- Chancellor of Federation University Australia, and was previously the Vice-Chancellor of the University of Ballarat. He has an extensive educational career background in Australia and New Zealand, and has also undertaken consultancies for UNESCO, the OECD and various other government agencies. He was foundation Chair of the Australian Regional Universities Network. Mr Battersby is the Chair of the Board of Education Australia Limited. Belinda Robinson, Non-Executive Director: Ms Robinson was appointed as a Non- Executive Director at in November She Is the CEO and Executive Director of Universities Australia (the peak body representing Australia s 39 comprehensive universities), as well as a Director of The Conversion Media Group and Education Australia. Greg West, Non-Executive Director: Mr West was appointed to the IEL board in December He is the current CEO of ASX listed Biotech company, Biopharma Limited, a Director of Education Australia, and a Director and Chair of the Audit Committee of UOWD Limited. Greg is a Chartered Accountant and has previously worked at Price Waterhouse, Bankers Trust, NZI and other financial institutions in various financial services and investment banking roles. Chris Leptos AM, Non-Executive Director: Mr Leptos was appointed as a Non- Executive Director in November He is currently Deputy Chairman of Flagstaff Partners, a Non-Executive Director of PPB Advisory and Arete Capital Partners, a member of the Australian Research Industry Advisory Board, the Advisory Board of The University of Melbourne Faculty of Business & Economics, a Governor of The Smith Family, and a Fellow of the Australian Institute of Company Directors. He was Managing Partner Government at Ernst & Young where he had national responsibility for the public sector and higher education practice. (IEL.AX / IEL AU) 46

47 Management team Andrew Barkla, CEO & Managing Director: See above Murray Walton, CFO & Company Secretary: Mr Walton joined s in March 2010 as Group Financial Controller. He has previously held senior finance and management roles with Kodak and SC Johnson throughout the APAC region. He started his career in finance with Fisher & Paykel before spending the next 25 years working for US based multi-nationals. Mr Walton is a Chartered Accountant and member of Chartered Accountants Australia and New Zealand. Warwick Freeland, Chief Strategy Officer & Managing Director IELTS: Mr Freeland has been with since November 2008 when he joined as GM, Strategy and Business Development, and is currently responsible for strategy, marketing, acquisitions, informational services, project management and IELTS. Prior to joining, he worked for Carl Zeiss Vision in Germany as VP Global Product Marketing & Innovation. Georgia Murphy, General Manage People & Culture: Prior to joining IEL in April 2009, Ms Murphy served in Human Resource management roles. She holds a Master s in Business from Victoria University of Technology, a Bachelor of Applied Science from RMIT, and a Graduate Diploma in Organization Development from Deakin University. James Cauchy, Regional Director Australasia: Mr Cauchy joined in January 2008 and is responsible for the group s onshore operation in Australia including Placements and IELTS. He also manages the Australian and New Zealand client relations functions, the web development team, and is responsible for the operation of IELTS and Student Placements in New Zealand, New Caledonia, Fiji, and PNG. Varaporn Dhamcharee, Regional Director South East Asia: Ms Dhamcharee joined in January 2015 and is responsible for s offices in five countries in the South East Asian Region Thailand, Vietnam, Singapore, Philippines and Cambodia. She has over 20 year s sales, commercial and general management experience, and is based in Bangkok, Thailand. Harmeet Pental, Regional Director South Asia, North America & United Kingdom and Network Shared Services: Mr Pental joined in March 2009 and is based in Gurgaon, India, where he is responsible for 36 offices in India, Mauritius, Bangladesh, Sri Lanka, Indonesia and Malaysia. He also takes care of the client teams based across the United States, Canada and the United Kingdom, IELTS operations in Canada and Network Shared Services. He has previously worked for Avon Products and VLCC in various general management roles, and holds an MBA and BA (Hons) in Mathematics from Dehli University. Allen Jiang, Regional Director North Asia: Mr Jiang joined in 2007 as Country Manager and is currently Regional Director, North Asia. He is based in Shanghai and is responsible for all aspects of s business operations in China, Taiwan and Hong Kong. Prior to joining the company, Allen was the Business Unit Director leading sales and marketing with Stryker, and before that spent 10 years with Johnson & Johnson in both their consumer and professional product divisions. (IEL.AX / IEL AU) 47

48 PEERS Figure 90: PEERS relationship matrix for IEL Source: Credit Suisse PEERS (IEL.AX / IEL AU) 48