On Thursday, Citi updated its outlook on New Oriental Education (NYSE:EDU), increasing the stock's price target to $127 from the previous $66, while keeping a Buy rating on the shares. This adjustment comes in the wake of the company's reported third-quarter fiscal year 2024 revenue surge of 60.1% year-over-year, primarily fueled by its K-9 education segment. Despite the revenue growth, non-GAAP EBIT margins remained relatively stable at 11.7%, attributed in part to the impact of the company's East Buy initiative.
The firm anticipates a 3 percentage point lift in margins if East Buy were excluded from calculations. Looking ahead to the fourth quarter of fiscal year 2024, Citi forecasts a 29% year-over-year increase in revenue for New Oriental Education but expects a decline in margins to 5.9%.
This anticipated dip is due to a planned capacity expansion from 20% to 30% for the full fiscal year, which is expected to account for a 4-5% margin impact in the fourth quarter alone. Additional factors contributing to the margin decrease include enhanced employee incentives and investments in new ventures.
Citi remains optimistic about the company's future, predicting a reversal in the downward margin trend. This expectation is based on industry consolidation and reduced expenditures on East Buy, which should help push margins up to 13.1% in fiscal year 2025.
The new stock price target reflects a significant increase of 92% and 90% to US$127 and HK$99, respectively, based on a 30x non-GAAP EV/NOPAT multiple. These figures are supported by anticipated revenue and earnings increases of 38%/61% and 30%/37% for fiscal years 2024 and 2025.
The firm's analysis suggests a 44% non-GAAP EBIT compound annual growth rate (CAGR) from fiscal years 2024 to 2026, highlighting the potential for margin improvements through network optimization. With these considerations, New Oriental Education has been named Citi's top pick within the K-12 education sector, with a preference for EDU shares over those of Gaotu, another player in the industry.
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