iCollege Limited is an Australian consumer services company focused on Vocational Education and Training (VET). The company has been acquiring and assembling a portfolio of Registered Training Organisations (RTO). It uses a cloud-based system for its learning management platforms that offer a range of accredited and non-accredited courses. iCollege listed on the ASX in May 2014 via a reverse takeover of DGI Holdings Limited.
VET refers to applied learning programs such as apprenticeships, traineeships, and work skills. The programs can vary from entry level qualifications to pathways into higher level tertiary education. The domestic demand for vocational education and training services is worth about $8 billion, around 80 per cent of which is funded via State and Federal Governments.
The industry has seen expanded revenues at a compound average rate of 6 per cent as private based VET services increased their market share. These private providers are known as RTOs.
iCollege’s current portfolio comprises of three RTOs which offer over 70 accredited and non-accredited courses across 22 industries. The company fully owns and operates Bookkeeping School Pty Ltd, Mathisi Pty Ltd and Management Institute of Australia Pty Ltd. It is in the process of expanding its current RTO portfolio as it is acquiring Apollo Healthcare Solutions, Celtic Training & Consultancy and Interlink Technology Pty Ltd.
What is iCollege’s development strategy?
iCollege has the potential to gain synergies associated with its acquisitions and targeted partnerships with industry bodies. Industry average completion rates for both public and private providers stand at ~25 per cent. The completion rates within iCollege’s portfolio are markedly superior, in the order of 90-95 per cent. The company is projected to sustain double digit earnings growth. Increased regulatory scrutiny provides an opportunity for iCollege to emerge as a leading ethical provider and acquire competitors at undemanding prices.
The company aims to form new partnerships with accredited industry trade bodies, and reduce its reliance on Government funding. iCollege’s principal economic drivers are student enrolments, completion rates, occupancy and teaching related personnel costs.
Reliance on Government Funding, Competition and Integration are Hurdles
Although the company is experiencing top line growth, iCollege is not profitable yet and it may take some before it reaches a self-funding position. iCollege’s operations have historically generated 80 per cent of income from Government sources. A task force is currently reviewing Federal government funding of the VET system, and reforms could have a significant bearing on iCollege’s capacity to generate revenue and its cost of doing business.
The company is currently reliant on external capital and there is no guarantee that its recent acquisitions can generate sufficient revenue to justify the investment. During FY15, the company recorded revenue of $0.6million and a net loss after tax of $2.3million. The company also faces integration risks since it is pursuing an aggressive acquisition strategy and there are various examples of companies who were not able to successfully merge businesses. It also faces competition risks are there are currently over 5,000 RTOs operating in Australia. This could have a significant impact on iCollege’s capacity to attract students and teaching personnel.
Is iCollege a Speculative Buy?
The existing income profile of its RTO portfolio, consolidation strategy, and completion rates are attractive qualities. The company offers speculative exposure to domestic demand for VET services. One of the major catalysts is the successful integration of its recently completed and pending acquisitions and partnerships with major industry bodies. Delivery of these milestones is incorporated into our financial projections, although the potential for further acquisitions remains an unaccounted source of upside.
Principal risks that surround the company are its substantial reliance on Government funding, potential for regulatory change to impact its cost of doing business, competition within the industry, and need to integrate its RTO portfolio.
After averaging the Comparables and CFME valuation methodologies, Wise-Owl has valued the stock at $0.22 per share. This valuation exceeds 100 percent to its current price of $0.09 and does not incorporate potential upside from future acquisitions.
|Simon Herrmann – Equity Analyst at Wise-owl
Simon is a financial advisor and analyst at Wise-owl. As an analyst Simon’s focus is the coverage of mid-capitalisation companies in the ASX300. His area of expertise includes information technology and cloud computing and his research reports are being featured on Bloomberg and Reuters.