Vocation picks up a sizeable chunk of the money that Australian governments fork out for vocational education and training. Of the $7 billion coming out of the public purse for that purpose in 2014, Vocation expects to pick up about $100 million.
Vocational education and training company Vocation (VET) is a good example of a stock with which the sharemarket had fallen in love – until recently.
Listed in December 2013, Vocation, which is a combination of three vocational education and training firms, delivers education and training services through workforce-based training and development programs for corporate and government clients; individual student training, online or face-to-face; and outsourced managed services to vocational training providers.
Vocation picks up a sizeable chunk of the money that Australian governments fork out for vocational education and training. Of the $7 billion coming out of the public purse for that purpose in 2014, Vocation expects to pick up about $100 million.
The company is particularly strong in Victoria, where students can take up to two vocational education courses to improve their employment prospects, mostly funded by the taxpayer. Under the Victorian model, government-supported places in vocational training courses are uncapped.
Vocation raised $253 million through the issue of 75.4 million shares at $1.89, capitalising it at $406 million. The shares surged 7.4% to $2.03 on debut, and settled nicely into life on the stock exchange.
For the half-year ended December 2013, Vocation brought in revenue of $58.9 million, just under half the full-year FY14 forecast of $118.3 million, and net profit of $7.5 million, or 38% of the full-year FY14 forecast of $19.6 million. The company maintained its FY14 guidance at its prospectus forecasts.
Then, for the full year ended 30 June 2014, Vocation reported revenue of $137.2 million, compared to prospectus forecast of $118.3 million, and net profit of $22.1 million, versus prospectus forecast of $19.6 million.
The Enterprise business, which delivers education and training services to corporate and government employees, performed strongly to deliver revenue of $50.2 million (prospectus forecast: $44.9 million).
The Direct channel, which caters to individual students, delivered revenue of $25.5 million (prospectus forecast: $22.3 million), with online enrolments in particular growing during the year.
Vocation’s Solutions business, which delivers outsourced managed services and industry consulting to third-party providers, generated revenue of $61.5 million (prospectus forecast: $51.1 million).
The company reported that student enrolments doubled over the year, to just under 50,000.
Operating free cash flow after capital expenditure at year-end was $27.7 million, representing a cash conversion ratio of 75%, matching the prospectus forecast. Vocation declared a maiden dividend of 3.2 cents a share.
During the financial year, the company diversified its revenue by acquiring three education providers at attractive multiples, which broadened the course menu it offers and also expanded its market reach into higher education and international students.
The company’s “aggregation” model – of buying rival businesses in the vocational education and training (VET) sector across the country – seemed to be working well, and the market lapped it up, taking the shares to $3.30 last month.
But then, Vocation and the stock market had the first serious tiff of their relationship.
Vocation revealed in August that three of its courses were under review by the Victorian Department of Education and Early Childhood Development (DEECD). Vocation also disclosed that payments to two of the company’s four Victorian registered training organisations (RTOs) were being withheld, pending a review that is expected to be completed by the end of October.
Vocation derives about 80% of its revenue from subsidiary BAWM, almost 90% of which comes from Victorian government VET funding. The prospect of this funding being withheld saw the sharemarket strip 30.6% from the Vocation share price, to $2.28.
Press reports speculated that the review could relate to the practice of “channelling”, in which a provider enrols students in courses other than what they originally intended to enrol in, in order to receive a greater level of government subsidy. A previous audit of BAWM, in December 2013, found evidence of channelling.
Vocation came out with another announcement, on September 18, stating that:
• neither the review nor its anticipated outcomes are expected to be material to the company.
• the review relates only to three of the courses conducted by the company for which it receives funding.
• the withheld payments relate to funding across two of the company’s four Victorian RTOs – the remaining contracted RTOs continue to receive all payments.
• the company’s funding contracts with the DEECD have not been suspended and are continuing.
In the meantime, Vocation says its acquisition program in the last months has diversified it away from its reliance on Victorian government funding – the company says it will halve the proportion of revenue derived from that source, from 80% in 2014 to 40% in 2015.
Moreover, it says the diversification program has lifted fee-for-service revenues from 13% of the total to 43%.
So – is the sharemarket fall an over-reaction? If so, that would provide a possible entry into the stock at a level that investors might have thought they were not going to see again.
The analysts that follow Vocation have not yet altered their earnings estimates for FY15. Vocation is expected to earn 21.2 cents a share, and pay a dividend of 14.4 cents a share. Before the DEECD-related announcement, that would have priced Vocation on 15.6 times earnings, and a dividend yield of 4.36%. With the share price fall to $2.28, you’re now being asked to pay – taking into account the uncertainty surrounding the DEECD review – 10.7 times forecast earnings, and a prospective dividend yield of 6.3%.
That is attractive enough to give Vocation the benefit of the doubt: and potential buyers can be heartened by the fact that two particularly savvy fund managers revealed substantial holdings in the company last month. According to substantial shareholder notices lodged with the ASX, Paradice Investment has a 5.5% stake and Platypus Asset Management has 5.1% holding.
But there is a big caveat over buying into Vocation: its “current government support” in Victoria is “$1.2 billion of funding over the next three years.” So the stock will only prove to be good buying at these levels if the DEECD review gives BAWM a very explicit tick of approval.
