VET - Vocation Limited

[tech/a]

So buy?

 

[DeepState]

So buy?

Depends. It's just cheap on the basis of fundamentals as I can observe them and compile them. No law of physics requires the price to converge to value in my lifetime.

I've posted because I'm waiting for someone to make that ..."but have you considered"...kind of statement that flips the argument on its head or causes me to set it aside. I'm actually expecting it because this kind of valuation gap is uncommon particularly in the absence of technological/development risks and monster leverage.

Clearing all these hurdles predisposes me to acquiring more of this stock. On a BS trading view, I'd say there may be a better opportunity to get set around Feb/Mar at the next debacle of a downgrade. Maybe it gets released with the Half Year. It's a question of when.

For you, perhaps, it is an opportunity to utilize your methods with a view to taking long positions if you come to the belief that valuation support provides an additional level of safety for long positions beyond what is discernible from your tool kit.

 

[tech/a]

Hmm I'll have a look

 

[TPI]

Higher Ed is still growing.

Thanks for your input RY.

For higher ed, the announcement says "The Higher Education business continues to perform well, albeit slightly behind forecast".

FY15 guidance for Higher Education went from 16 to 14.8, so 7.5% lower than initially anticipated, which to me seems a bit more than "slightly" behind.

To me it suggests their overall FY15 estimates are a real ball park figure that they don't quite have a full grasp of, and that could easily surprise on the downside (or even upside).

I also think the general choice of words in their announcements could be better, eg. "The company remains in a healthy financial position with fully drawn debt facilities of $120 million..." - notwithstanding their cash on hand, not sure how having a fully drawn debt facility with significantly impaired ability to raise more debt or equity can be considered healthy?

 

[McLovin]

I also think the general choice of words in their announcements could be better, eg. "The company remains in a healthy financial position with fully drawn debt facilities of $120 million..." - notwithstanding their cash on hand, not sure how having a fully drawn debt facility with significantly impaired ability to raise more debt or equity can be considered healthy?

They will not be making any acquisitions anytime soon, so $55m in cash will be used to pay down debt. It's hard to see how their bolt on acquisitions can be that affected by this. I spent this afternoon fighting jetlag and working on this. It's easy to use the old "be greedy when others are fearful" line when everything is cheery, but, imo, it's much harder to do when everyone says the game is up.

 

[luutzu]

Thanks for your input RY.

For higher ed, the announcement says "The Higher Education business continues to perform well, albeit slightly behind forecast".

FY15 guidance for Higher Education went from 16 to 14.8, so 7.5% lower than initially anticipated, which to me seems a bit more than "slightly" behind.

To me it suggests their overall FY15 estimates are a real ball park figure that they don't quite have a full grasp of, and that could easily surprise on the downside (or even upside).

I also think the general choice of words in their announcements could be better, eg. "The company remains in a healthy financial position with fully drawn debt facilities of $120 million..." - notwithstanding their cash on hand, not sure how having a fully drawn debt facility with significantly impaired ability to raise more debt or equity can be considered healthy?

There's a saying, "When in doubt, stay away."

I think that if you spend a week or so and it hasn't yet hit you in the face that it's a bargain... move on to other opportunities.

 

[DeepState]

Thanks for your input RY.

For higher ed, the announcement says "The Higher Education business continues to perform well, albeit slightly behind forecast".

FY15 guidance for Higher Education went from 16 to 14.8, so 7.5% lower than initially anticipated, which to me seems a bit more than "slightly" behind.

To me it suggests their overall FY15 estimates are a real ball park figure that they don't quite have a full grasp of, and that could easily surprise on the downside (or even upside).

I also think their general choice of words in their announcements could be better, eg. "The company remains in a healthy financial position with fully drawn debt facilities of $120 million..." - notwithstanding their cash on hand, not sure how having a fully drawn debt facility with significantly impaired ability to raise more debt or equity can be considered healthy?

The important issue for Higher Ed is not so much a downgrade in expectations but that it is still moving forward. It is still well ahead of the FY14 pro-forma EBITDA and we are now half way through the year. Let's say that there is a further downgrade of equal magnitude in H2...the point still stands and the argument doesn't alter much. The performance of Higher Ed contrasts with the catastrophe in MyVocation which is mostly concentrated in a few large contracts that seem to have been discontinued. If the latest developments were a franchise killer for Higher Ed, this would be visible as more than a decline in growth rate.

FY15 will surprise on the downside from these figures. It factors things in which don't make sense from a central case...like winning back a stack of MyVocation contracts months after the business has been cratered. My argument is that you can wipe out anything else in FY15 and beyond besides Higher Ed and the stock would still be fair/cheap. So whatever it turns out to be, as long as the underlying contributions from the other bits don't go negative and stay there, FY15 can do whatever it wants. The business has virtually no fixed costs. This is great because implosion can be met with a reduction in the cost base relatively quickly. If demand is not there, costs don't have to be either. Hence, the skew is positive. As discussed, it does not seem reasonable for everything other than High Ed to have been shuttered. It should be noted that what matters is actually underlying FY15. FY15 has significant one-offs in there. Some have been quantified. Others, like not reducing the cost base instantaneously in Victoria, are not mentioned.

They had announced net debt of $55m although UBS suggests that this has moved to $65m. In combination, this implies they still have a fair chunk of cash on balance sheet. This is not a capital intensive business. The available cash is about the size of the entire receivables book. They run cash positive. They can cut dividends. In a static state, it's fine. Subject to odd definitions in their debt covenants, it will pass those. However, the lack of access to finance will limit their ability to grow via acquisition, which was the agglomeration business model at the outset. They will need to grow organically. It could be said that capital constraints will limit their ability to do more stupid things. Nothing relating to value-add via acquisitions is in these figures.

 

[skc]

For higher ed, the announcement says "The Higher Education business continues to perform well, albeit slightly behind forecast".

FY15 guidance for Higher Education went from 16 to 14.8, so 7.5% lower than initially anticipated, which to me seems a bit more than "slightly" behind.

To me it suggests their overall FY15 estimates are a real ball park figure that they don't quite have a full grasp of, and that could easily surprise on the downside (or even upside).

My guess is that they beefed up the initial forecast to make the first downgrade look less bad...

I also think the general choice of words in their announcements could be better, eg. "The company remains in a healthy financial position with fully drawn debt facilities of $120 million..." - notwithstanding their cash on hand, not sure how having a fully drawn debt facility with significantly impaired ability to raise more debt or equity can be considered healthy?

They don't really need to raise more equity or debt. They are not expanding and there's limited sustaining investment. There's a large transition in business model (from 3rd party to in-house providers) that will however incurr large one-off expenses.

I've posted because I'm waiting for someone to make that ..."but have you considered"...kind of statement that flips the argument on its head or causes me to set it aside. I'm actually expecting it because this kind of valuation gap is uncommon particularly in the absence of technological/development risks and monster leverage.

A few things that are hard to quantify at present.
- The change in business model (from 3rd party to inhouse) and what the new steady state looks like. I'd imagine ROE will take a hit.
- 2-3 class actions. I am unsure who pays the bill, but I can't imgaine they can get away with it... especially given that they raise capital whilst under investigation.
- A bit of a long shot... the banks take control on the company knowing that it can be sold to recover 100% of the debt + some equity value.

Clearing all these hurdles predisposes me to acquiring more of this stock. On a BS trading view, I'd say there may be a better opportunity to get set around Feb/Mar at the next debacle of a downgrade. Maybe it gets released with the Half Year. It's a question of when.

Also a question of what the share price would be by the time. It could easily float up 100% before the downgrade, and down 30% on that new news. Waht I am saying is that there's no guarantee that the price after the 3rd downgrade would be lower than today's price.

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.

That's true but I can't readily think of a would-be acquirer. The private equity won't touch them as many exit strategies would remain close for some time. Trade sale, yes, but who? ASH? It's not that big and a VET with EV of $100m would be a large bite.

In the near term, there is likely distress selling going on right now.

230m shares on issue, with some 31m on escrow (I think) and Bret Whitford holding 18m (and not sold any from what I can see)... so only 181m is liquid. It's traded 103m volume in the 2 sessions since the re-open. So another 40-50m traded would means that most people who wants out at any price would definitely be out.

It remains to be seen whether the share price can melt up slowly after that.

 

[McLovin]

My argument is that you can wipe out anything else in FY15 and beyond besides Higher Ed and the stock would still be fair/cheap. So whatever it turns out to be, as long as the underlying contributions from the other bits don't go negative and stay there, FY15 can do whatever it wants. The business has virtually no fixed costs. This is great because implosion can be met with a reduction in the cost base relatively quickly. If demand is not there, costs don't have to be either.

Ed Zachery. Great posts too, RY.

I'll try and post something more meaningful up tomorrow. Right now, I'm done.

 

[DeepState]

A few things that are hard to quantify at present.

- The change in business model (from 3rd party to inhouse) and what the new steady state looks like. I'd imagine ROE will take a hit.
- 2-3 class actions. I am unsure who pays the bill, but I can't imgaine they can get away with it... especially given that they raise capital whilst under investigation.



That's true but I can't readily think of a would-be acquirer. The private equity won't touch them as many exit strategies would remain close for some time. Trade sale, yes, but who? ASH? It's not that big and a VET with EV of $100m would be a large bite.



230m shares on issue, with some 31m on escrow (I think) and Bret Whitford holding 18m (and not sold any from what I can see)... so only 181m is liquid. It's traded 103m volume in the 2 sessions since the re-open. So another 40-50m traded would means that most people who wants out at any price would definitely be out.

Thanks as always for these valuable comments (and to others too). It's fantastic to be able to work on a case together, in concrete terms, whatever our individual views are. May there be many more.

My to do list:
- check the Endeavour model for outsourced third party exposure (this company targets a different segment within Higher Ed and Higher Ed is not VET.
- Litigation settlement expectations. This is probably the biggest downside swing factor not in my numbers. Will need to check the case history and understand whether any of this exposure is insured or otherwise defrayed in some way. They make some reference to an exposure which they were led to believe was negligible prior to the bombshell. Hopefully I can find out what the basis was. If solid, they have a viable mitigant. If not, there will be a settlement.


On others, Avana was effectively the acquiring party in the IPO process and it was a minority. Hence some sort of reverse merger amongst unequals backed by PE in some way is probably viable. Not factoring anything for this anyway. It's just an upside case without ascribed value.


The voluntary escrow period has not yet been passed. How pissed off must they be? No research required.

 

[tech/a]

Ive had a read of the discussion.

You guys obviously know your stuff on the company.
But I also notice a whole wad of what if's/this could
I haven't included points in the discussion between you.

There is no conclusion and there cant be yet.

This is the very reason I don't trade Fundamentally or have any interest in delving into fundamentals on a case by case basis.---too many variables--what ifs and that's the case with the Known's--how much don't the public know---and I think R/Y eluded to that in his to do list.

But while there is a suggestion that this MAY be a good buy there is a great deal of hesitation and for good reason.
I guess the intense discussion could lead to those interested to place on a watch list.

But its my opinion and observations from bottom picking in the past that by the time you see an answer to the fundamental possibilities affecting a stock you've missed the vast majority of any corrective move.

From a chart perspective Ive noticed a few volume spikes and these are the ones of interest.

I note that the initial fall to the 50c range didn't see massive selling---catching many no doubt by surprise and not wanting to liquidate a loss --hung on---the real volume appeared last week with 80 odd million. as it smashed lower.
In situations like these Ive found that it takes stocks like this forever to move forward as initial buyers trapped in badly losing positions take the opportunity to sell off on any move up---particularly a strong move.

Frustration at 3 steps forward then 4 back.
For me unless a number of things go away then you wont see accumulation--just minimising of loss.
So I suspect a long term ranging of this stock from 14c to 50c Could be lower if the could be's don't pan out.

Sure there could be a drink in there ---but not for me.

Seems like a lot of effort---particularly if you do this with a lot of stocks testing a bottom.

 

[Ves]

I think the business fundamentals are pretty much irrelevant at this point in time. I have absolutely no faith in the thinking along the lines of this isn't an engineering business so it'll muddle through with its own cash flow.

It's pretty obvious that two immediate threats could wipe out 100% of the equity in this business:

1) The banks calling in the debt & assuming control of company after a covenant breach, especially with uncertainty around point 2)

2) Unsuccessful class action result (Note: the litigator is also reviewing pre-IPO occurences, so could get very nasty fast) & director negligence breaching the insurance contracts.

It's probably highly unlikely that they could raise any more capital from the market to save themselves.

Yep, there's a chance that 1) & 2) won't occur.... but sitting here I think it's absolutely impossible to get any gauge on that.

At this very point I don't think the company has much control over their own destiny.

 

[galumay]

I have taken a small position, my remaining concern for catastrophic risk is the legal action, the underlying business is good enough if they can pass the litigation hurdle. Therefore position is small and in my speccy portfolio.

 

[McLovin]

Founder has upped his stake from 9% to 15%.

 

[tech/a]

Founder has upped his stake from 9% to 15%.

Would have been smarter to sell out a year ago and buy in again today.

There was a company called Insight Trader years ago who made a big deal about notifying members when directors/owners increased their holdings.
Lasted until the crash and when you had a look back more equities fell than increased on this news.

Again it makes sense but in reality--

 

[McLovin]

Would have been smarter to sell out a year ago and buy in again today.

I doubt he was allowed to. I'm going through an IPO at the moment and the escrow agreement is 15 pages long.

 

[tech/a]

I doubt he was allowed to. I'm going through an IPO at the moment and the escrow agreement is 15 pages long.

It could be argued that he'd have known his position.
---thought of that myself

 

[McLovin]

It could be argued that he'd have known his position.
---thought of that myself

I don't follow, sorry.

 

[tech/a]

Obviously I'm missing something here?

As a founder I'm presuming he is a director.
As a director any sale before such a massive dive could be
viewed----Id have thought as insider trading.

 

[McLovin]

Obviously I'm missing something here?

As a founder I'm presuming he is a director.
As a director any sale before such a massive dive could be
viewed----Id have thought as insider trading.

He's not a director. There's some history with him and the current CEO.