VET - Vocation Limited

[Wysiwyg]

Funny that yesterday John Dawkins was writing in the AFR about how he bought more VET shares after they fell.

http://www.afr.com/p/business/companies/why_john_dawkins_thinks_vocation_bPg2aJfgxAo7woCGe3Gz3I

This article when knowing the "market update" due out today? He didn't mention the class action under way. This quote below is expected when you're sitting on a massive loss.

Vocation is wearing the scars of novelty and, *apparently, suspicion – which is unjustified.

Admittedly oversold in the short term but what does the future hold.

Once we knew of the problems, we took action to address them. Vocation can now refocus its energies on providing high-level education services to Victorians – with continuing *support from Victorian government programs.

Means --- once we got busted with this nice little money spinner. Would you admit, would I.

 

[ROE]

Truely epic in deed... and it's all due to it's own undertaking. There's nothing else to blame.

Changing from market darling to an absolute thrashing in the blink of an eye.

P.S. Good trading today though.

epic failed but their problem is fixable and that what I am looking for
is the business model ok and can the problem be fixed

I will hold for 5-10 years and and wait for the turn around

this stock has the problem of ckf and ccp combine -
new to the market and don't know how to guide the market and one big %^#* up
but in my opinion all fixable

 

[skc]

epic failed but their problem is fixable and that what I am looking for
is the business model ok and can the problem be fixed

I will hold for 5-10 years and and wait for the turn around

this stock has the problem of ckf and ccp combine -
new to the market and don't know how to guide the market and one big %^#* up
but in my opinion all fixable

Probably... at <20c it's not really pricing much of a business at all.

Their balance sheet is not looking crash hot though. At FY14, Cash $21.7m and debt of $42.6m. Since then they raised $74m. Today they said cash of $55m while debt is fully drawn at $120m.

In other words, they went from $21m net debt at report, to $53m net cash after the raising, to $65m net debt doay.

So they burn through $118m in about 3 months?! How's that possible?

 

[VSntchr]

Their balance sheet is not looking crash hot though. At FY14, Cash $21.7m and debt of $42.6m. Since then they raised $74m. Today they said cash of $55m while debt is fully drawn at $120m.

In other words, they went from $21m net debt at report, to $53m net cash after the raising, to $65m net debt doay.

So they burn through $118m in about 3 months?! How's that possible?

Glad you confirmed that for me. I wondered how they can say they have a healthy balance sheet in the same sentence that they said debt facility of $120m is FULLY DRAWN after previously having far more legroom!?

 

[McLovin]

Probably... at <20c it's not really pricing much of a business at all.

Their balance sheet is not looking crash hot though. At FY14, Cash $21.7m and debt of $42.6m. Since then they raised $74m. Today they said cash of $55m while debt is fully drawn at $120m.

In other words, they went from $21m net debt at report, to $53m net cash after the raising, to $65m net debt doay.

So they burn through $118m in about 3 months?! How's that possible?

They acquired Endeavour on the 1st of July for $84m.

ETA: Bought in today at 18c.

 

[galumay]

I had a scan over this one to see if the carcass was worth a nibble, but I am not sure the business can survive carrying that amount of debt and the collateral damage of the victorian cockup.

I think if I was seriously looking at a punt it would be a very small allocation of capital and treat it as a purely speculative play.

 

[DeepState]

Take a look at the debt covenants.

p8. 2014 Annual.

Somewhat uncomfortable. Becoming fully drawn heading into this situation is a flag.

 

[galumay]

Take a look at the debt covenants.

p8. 2014 Annual.

Somewhat uncomfortable. Becoming fully drawn heading into this situation is a flag.

yep, i saw that and hence my previous comments, havent done the numbers but both of those covenants look shaky.

 

[skc]

Their balance sheet is not looking crash hot though. At FY14, Cash $21.7m and debt of $42.6m. Since then they raised $74m. Today they said cash of $55m while debt is fully drawn at $120m.

In other words, they went from $21m net debt at report, to $53m net cash after the raising, to $65m net debt doay.

So they burn through $118m in about 3 months?! How's that possible?

They acquired Endeavour on the 1st of July for $84m.

ETA: Bought in today at 18c.

Ahh.. thanks. I thought over dinner that it's not possible for them to burn that much cash considering the size of their operations. They have also paid ~$7m in dividends and had a $3.6m tax bill under current liabilities. So all in all a cash burn of around $23m which makes sense.

So with net debt of $65m, and market cap ~$45m... EV = $110m. EBITDA guidance mid point = $27.5m, but that consists of -$8m in H1 and $35.5m H2. So a steady state (if they ever get back to such state) EBITDA of $50m is still quite possible.

On the debt convenants mentioned by RY... annual report has them at gearing < 2.75:1 and interest cover > 3.

So this year net debt of $65m vs EBITDA of $27.5m gives 2.36 (so just under). Although the 6-month test for H1 is assured to fail, the banks (3 of the Big 4) may choose to not call in the loans, although interest rates might go up. Interest payment on $65m debt @ 7% is <$5m, so this test should be OK with D&A ~$3.7m in FY14.

So they should survive... right? This isn't like a FGE situation where they don't have a handle of costs to actually complete the projects. I'd never imagine that a seemingly steady education provider with mainly government revenue could blow up just as spectacularly.

84m out of 230m shares traded today... instos were dumping this like it won't survive. It looks like it should, but time will tell.

 

[DeepState]

yep, i saw that and hence my previous comments, havent done the numbers but both of those covenants look shaky.

It's more likely than not to get through this tight spot and has a couple of years to run before the facility needs to be reviewed as a whole. Probably will run cash positive and hence not starve. Will have to go organic as capital markets hate it or otherwise have the mother of all dilutions. Almost no tangible value, but unreasonable to think it has no franchise value despite the stuff ups. Priced for utter destruction.

The scenario of meeting FY15 guidance could see this dog with feral fleas double...and it would still be priced as a dog albeit with less fleas. High risk, including a scenario of total capital loss which is not remote. However, the return potential looks to be there. + 20% carry.

 

[McLovin]

Ahh.. thanks. I thought over dinner that it's not possible for them to burn that much cash considering the size of their operations. They have also paid ~$7m in dividends and had a $3.6m tax bill under current liabilities. So all in all a cash burn of around $23m which makes sense.

I'm not sure but have they also paid back that $19.6m to the Vic government? I think they were going to receive ~$10m in funding from the government too. It's a bit of mess at the moment (acquisitions, fines, rebates, cap raisings), a lot of moving parts.

So with net debt of $65m, and market cap ~$45m... EV = $110m. EBITDA guidance mid point = $27.5m, but that consists of -$8m in H1 and $35.5m H2. So a steady state (if they ever get back to such state) EBITDA of $50m is still quite possible.

On the debt convenants mentioned by RY... annual report has them at gearing < 2.75:1 and interest cover > 3.

So this year net debt of $65m vs EBITDA of $27.5m gives 2.36 (so just under). Although the 6-month test for H1 is assured to fail, the banks (3 of the Big 4) may choose to not call in the loans, although interest rates might go up. Interest payment on $65m debt @ 7% is <$5m, so this test should be OK with D&A ~$3.7m in FY14.

So they should survive... right? This isn't like a FGE situation where they don't have a handle of costs to actually complete the projects. I'd never imagine that a seemingly steady education provider with mainly government revenue could blow up just as spectacularly.

84m out of 230m shares traded today... instos were dumping this like it won't survive. It looks like it should, but time will tell.

I don't think they're the same as FGE, although I've seen a few people make the comparison. There are still kids turning up to these guys schools. They're still paying for the courses etc. The cost of providing a course hasn't changed. How bad can the reputational damage be? I just can't envisage it being so terrible that they implode because no one wants to get training from them. Yet the shares are being priced as though that is a very likely outcome.

They'll breach the bank covenants this half and I'm sure they've had a few concerned bankers knocking on their door, but, as long as they have some faith that VET can service its debt in the short term, they won't be calling in the loans, imo.

They'll spend a few years in the wilderness.

 

[skc]

I'm not sure but have they also paid back that $19.6m to the Vic government? I think they were going to receive ~$10m in funding from the government too. It's a bit of mess at the moment (acquisitions, fines, rebates, cap raisings), a lot of moving parts.

MacQ has the negative cashflow @ ~$20m so that's close enough.

I don't think they're the same as FGE, although I've seen a few people make the comparison. There are still kids turning up to these guys schools. They're still paying for the courses etc. The cost of providing a course hasn't changed. How bad can the reputational damage be? I just can't envisage it being so terrible that they implode because no one wants to get training from them. Yet the shares are being priced as though that is a very likely outcome.

No it's not the same... but the implosion is just as spectacular. The average kid going to the gardening or security courses probably doesn't know VET from a bar of soap, and they certainly wouldn't know VET operates under a few different banners. I really don't know the selection criteria for these students in the first place (probably location + where their friends go). But the revised guidance was largely a result of "unexpected" contagion... so who knows?

 

[TPI]

I don't think they're the same as FGE, although I've seen a few people make the comparison. There are still kids turning up to these guys schools. They're still paying for the courses etc. The cost of providing a course hasn't changed. How bad can the reputational damage be? I just can't envisage it being so terrible that they implode because no one wants to get training from them. Yet the shares are being priced as though that is a very likely outcome.

I think "contagion" describes it best. I read that 2000+ kids got their qualifications from VET overturned, so presumably they have to redo some or all of their subjects again? If a few of these kids got onto social media to vent, told a few of their mates and so on, and on top of this their referral base starts to exercise some caution when recommending kids to use VET or not for their own sake as well as the kids, couldn't this explain the "unexpected" drop in enrolments? Just saying, I was going to buy at 62c then decided against, but may still proceed depending on how things progress.

 

[DeepState]

I read that 2000+ kids got their qualifications from VET overturned

Do you have a source available please?

Disc: VET initiated today VWAP 18.5. Immaterial.

 

[TPI]

Do you have a source available please?

Disc: VET initiated today VWAP 18.5. Immaterial.

I've read it a couple of times, I think initially on AFR.

Can't quite find the article on AFR now, but here is one from another paper:

http://m.theaustralian.com.au/busin...head-of-guidance/story-e6frg906-1227141731518

"Last month, it was revealed Vocation is embroiled in an audit review by the federal skills regulator, while Victorian authorities have revoked the qualifications of 2,400 students in a separate probe."

It is just one line and mentioned in passing, but caught my interest.

I have not seen much detail about what this separate probe was, but someone here might be able to find it.

 

[McLovin]

I've read it a couple of times, I think initially on AFR.

Can't quite find the article on AFR now, but here is one from another paper:

http://m.theaustralian.com.au/busin...head-of-guidance/story-e6frg906-1227141731518

"Last month, it was revealed Vocation is embroiled in an audit review by the federal skills regulator, while Victorian authorities have revoked the qualifications of 2,400 students in a separate probe."

It is just one line and mentioned in passing, but caught my interest.

I have not seen much detail about what this separate probe was, but someone here might be able to find it.

That's a very poorly worded sentence. The two statements are tangentially related but have a comma seperating them as though they are linked. Bring back subbies!

Perhaps...

Meanwhile, in a separate probe, Victorian authorities have revoked the qualifications of 2,400 students.

 

[DeepState]

That's a very poorly worded sentence. The two statements are tangentially related but have a comma seperating them as though they are linked. Bring back subbies!

Perhaps...

Thanks TPI.

The 2,400 is very unlikely to relate to Vocation in isolation. The DEECD probe related to just three courses offered in Vic. Two were very specific disciplines. Total enrolments for 2014 was about 27,000 students. The RTOs in question are still completing their courses and will cease to operate once the last of the currently enrolled students graduates. New students will be enrolled with other VET RTOs that will still be running. There are two remaining in Vic that are still being funded and, to my knowledge, not under investigation.

This gig segments on geography and between vocational and higher-ed. Contagion is an issue for the remaining two RTOs in Vic. It will be less of an issue for, say, non-Vic Higher Ed. Higher Ed is still growing.

Still running the numbers. At this time, the price looks like it is assuming total loss of the vocational business nationally and an uninteresting Higher Ed assuming debt is not pulled to totally bankrupt the company with no residual. Pulling in the debt could be as high as a 25% likelihood and even this scenario would be regarded as fair value. The incentives for the banks to do this are low, but the wording of the covenants is actually unclear and the specifics matter a lot. I am checking.

Guidance for H2 FY15 still looks aggressive and assumes a good bounce in Vic vocational. However I need to re-run a few things. It would not be surprising at all to see FY15 slashed by 50% (think of what that means for H2). I am almost certain that further material downgrades will be forthcoming. Also, earnings will be smacked by non-cash write-downs of goodwill and more rapid amortization of 'intellectual property' which has not proved to contain sufficient intellectual content. In reality, the market is discounting much of this already. Nonetheless, confirmation can still lead to further price pressure and offer a better entry point. But this can get tricky depending on how the net debt leverage ratio is actually calculated.

This thing is on a fire sale from what I can currently discern in a few hours of research. I am checking for "too good to be true" risk. What am I missing? Blink blink.

 

[DeepState]

Total enrolments for 2014 was about 27,000 students.

typo:

FY2014 enrolments: 45k
FY2014 graduation: 27k

 

[VSntchr]

This thing is on a fire sale from what I can currently discern in a few hours of research. I am checking for "too good to be true" risk. What am I missing? Blink blink.

Thanks for the post RY, I doubt I will be able to add anything of value after the posts in this thread from yourself and others. Nonetheless, I am having a look at this over the weekend.

 

[DeepState]

On valuation grounds, this is very cheap indeed. I can readily see 100% upside type scenarios, even as bear cases.

One way to generate a scenario to justify the current valuation requires nearly 90% wipe out of the founding businesses on sum of acquisition value basis (plus various adjustments for Endeavour, Vic restructure, franking accumulation and DEECD). That's wholly unreasonable when you consider how the business is structured and that pretty much all of the screw up occurred within the BAWM founding component and it is where they are seeing major contract losses via the MyVocation student acquisition business. Setting the entire BAWM acquisition value to zero (ie. wiping out half of the original company value at IPO) still requires nearly 80% wipe out of Avana and CSIA businesses. These operate in entirely different segments and under different brands. It would require the loss of the entire solutions business, entire enterprise business and half of the direct business for example. That's not reasonable.

On a forward looking basis, the value implicit in the Higher Education component, which is largely via the Endeavour acquisition and continues to grow, can be used to derive a valuation at 10x adj FY15 earnings, even if it carries the entire debt burden. In other words, the business is fair value or even cheap if all it has left is the Higher Ed business.

When you have Avana, CSIA, Real and Endeavour's non Higher Ed businesses involved who operate in geographically distinct and via different channels, serving different industries, differing in levels of education offered, under different brands, total loss of these businesses is not really a viable central case or even a bear case. It would need to be something considerably more virulent than the house of brands version of ebola to yield this outcome. It's possible, but nowhere near a central case. Please look into the Real Institute and Endeavour Institute sites and see if you can find all that much to link them, for example.


The business model was about industry consolidation. That is broken. The claims to be experienced on this stuff were remarkably light. They have been found wanting even amongst the founding members. Two senior executives (COO and Exec Manager-Education) would have been struck off Christmas lists by now. They cannot finance any such ambitions this at anywhere the same rate as might have been envisaged. Four acquisitions in four months...boom. That was quick. If anything, they are better considered as a target for consolidation at this time. Given the share price and current circumstances, the scenario is realistic.

The FY15 figures require a recovery from H1 that is not reasonable. Something like half of the losses in H1 are assumed recovered in H2. A dead cat would need to be filled with super high bouncing balls to achieve a bounce like this. Downgrades. Downgrades. The enrolment period in early 2015 will be telling. Expect another market update.

It looks like this is very cheap as would be expected given the degree of disappointment experienced. Over time, this should be realized. In the near term, there is likely distress selling going on right now. The lack of an honest assessment of the outlook may keep the price weak until things stabilize. Despite misjudgments, this does not appear to be a company killer.

Famous last words:

"The reports of my death have been greatly exaggerated" - Mark Twain