“If you don’t make mistakes, you can’t make decisions.” – Warren Buffett
In the last 12 months we have seen some spectacular falls from grace in the ASX-listed education sector.
Vocation Limited (VET) reached their peak of $3.30 in September 2014 and before entering voluntary administration in December 2015 you could buy as many shares as you like for just 12 cents. They had been listed on the ASX for just two years.
New Zealand-based Intueri Education (IQE) listed on the ASX in May 2014 at $2.36 has seen a steady decline to under 50 cents. It was so low that when they announced they were under investigation for “Serious Fraud” by the Serious Fraud Office the share price hardly moved.
Ashley Services (ASH) listed at a high of $1.92 in August 2013, promised the world and continued to significantly under-deliver. They are still trading but at a mere $0.16.
Similarly, Academies Australiasia’s (AKG) business has just continually underperformed and as a result the share price has followed it all the way down from $1.32 in July 2014 to around $0.20 in April 2016.
Lastly, Australian Careers Network (ACO), the most recent training provider to have their registration stripped is currently awaiting legal action to be heard in October this year after their $40m payment from the Commonwealth for VET FEE-HELP funding was cancelled. Their shares have been voluntarily suspended since October 2015 and have just announced voluntary administration.
Here is what this looks like in graph format.
While each situation is different, they all share the attribute of being registered training organisations whose shareholders have been left with the bill for their often misleading, allegedly unethical and generally poor business decision making.
But if you don’t learn from your mistakes (or other people’s mistakes) you are bound to repeat them. This is as true in life as it is in investing. Here are a few to write down.
Avoid companies whose income is highly reliant on government policy and budgeting
This has a couple of facets to it. If your income comes from a single source – the government or otherwise – your income risk is high. The moment that one source decided to pull the pin and channel their funds elsewhere you are without a business.
Further, if your business comes indirectly from the government in the form of consumer subsidies – such as in healthcare for example – a careful risk analysis must also be undertaken because these subsidies are always being reviewed and can be subject to changes in government and budget priorities.
For example, uncertainty surrounding the future of government contributions for diagnostic imaging has caused the share prices of Integral Diagnostics and Capitol Health (CAJ) and Integral Diagnostics (IDX) to come off significantly in recent months.
Question questionable growth forecasts
I am speaking primarily regarding ACO in this one, who acquired legitimate VET providers to leverage as a channel for more Commonwealth funding. It has been reported that they were using brokers and shady tactics to entice low-income earners to sign up to courses they didn’t need so they could collect the VET payment from the government up front, which were unlikely to repaid by these low income students.
The company was forecasting over 200% growth to $60m in 2016, a growth rate that our own internal Discounted Cash Flow valued the company at $9.62, meaning the current price of $3.43 was a 180% discount to the valuation. A value investors dream! I have no doubt that had no questions been asked by the regulator they would have achieved this too. But when a 3 year old company is forecasting 200% growth to make $60m, questions need to be asked by everyone.
Phoenix Institute was acquired by ACO for $4.5m in January 2015 and by June 2015 had contributed $54m in revenue and $11m in net profit to the group. That’s a 0.4x NPAT multiple!
That. Doesn’t. Happen.
This contribution by Phoenix Institute was buried in a small subsection of Note 24 of the 2015 financial statements, and you only had a week to find it before the company’s shares were suspended from trading.
Be wary of over-hyped industries
After the deregulation of the vocational education industry 5 years ago, the door was opened to private operators with a blank cheque at their disposal. Big money was being earnt (legitimately and otherwise) which led to the listing of many companies touting high growth.
It was an easy sell and any broker’s dream, and many companies like Australian Careers Network became the darling of many portfolios.
But in value investing, the best buys are often the ones that no one has heard of. Brokers are not pushing the price up by peddling it to their clients. It can be daunting if there are few others in the market agreeing with your analysis so this is the time to back yourself.
These gems can be hard to find though and the pursuit of little known companies can easily be drowned out by the latest hot stocks or sectors.
Hindsight is 20/20
In hindsight, it seems so obvious that these companies would not recover. But the warning signs have been there ready for anyone with a fine tooth comb to find them. So I will leave you with one final piece of (general) investing advice:
Take everything management says with a healthy degree of skepticism. Build your financial model based on the lower end of their guidance and consider what must occur for them to actually reach their forecasts.