VET - Vocation Limited

[DeepState]

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.

Endeavour is all in house. They are doing aaaaalright thank you very much. No sign of contagion from BuildIt. I'd be interested to know how many current and prospective students in Health and Beauty have even heard of BuildIt.

Litigation outcomes of $5-$25m are inferred from the case history of the last five years. That was for listed companies under failure to disclose and misleading conduct charges. Nothing comes vaguely close to the full face exposure (~240m). Lots of big names with big balance sheets. That's before recoveries from, say, PWC and Dawkins...or their insurers. They will end up settling in a couple of years.

Covenants remain an issue to review. Have gotten some good colour of how the whole thing works. Will get some more. I'm not very comfortable. However, if this thing breaches covenants, it is more for technical reasons than for any real risk of cashflow or accounting default. A rebuild of the cash drain suggests that they are unlikely to hit the floor unless you are anticipating another 2x proportionate disasters of the H1 magnitude.

Still looks cheap unless there is around 50% wipe out risk for zero recovery. Roughly assuming purchase value of Endeavour and Real remain intact (no value for the other little ones) and half of the bit that BAWM didn't kill remains alive with outer band for litigation (with zero recovery). That doesn't look reasonable as a central case at all. This is not a high NTA business. Consequently equity and debt are more closely aligned. The sorts of things I would want as a banker are not all that different to what I would want as an equity holder. Cut to the chase as opposed to the bone, pay down debt.

 

[AUSG]

This is not a high NTA business. Consequently equity and debt are more closely aligned. The sorts of things I would want as a banker are not all that different to what I would want as an equity holder.

Sorry, newbie question here.

The lack of of NTA means that there is nothing for the banks to seize in the event of a default, so their interests are best served by keeping the company alive to keep paying interest and debt. Thus their interests are aligned with shareholders. Is my understanding correct?

Thank in advance

 

[DeepState]

Sorry, newbie question here.

The lack of of NTA means that there is nothing for the banks to seize in the event of a default, so their interests are best served by keeping the company alive to keep paying interest and debt. Thus their interests are aligned with shareholders. Is my understanding correct?

Thank in advance

You clearly aren't going to be a newbie for long. Shall revert with more detail on how all this might work when I get more. It's the final piece for me. It's only a small position for me. Other fish to fry...

 

[DeepState]

What I learned today:

Consensus is that the interest cover is based on EBITDA. The debt ratio is based on market value, not book.

There is divergent opinion as to whether the company would be left alone, worked out or scorched in the event of covenant breach. It would certainly be scorched in the event of high physical collateral.

There is no such thing as a standard covenant. So it is unclear, and will not be revealed, what the specific detail is.


Thinking:

In the event of a total scorch the earth, the company would not be shut down in one second with all remaining tables and chairs brought to a second hand furniture place. If they did that, who would ever do business with them ever again? It also crystalises the absolute worst case outcome. - total wipe out. It would also be completely bone-headed. If they want to scorch the earth, administrators would be brought in for an orderly sale of the operating businesses. It is not actually insolvent.

The alternative is to take over management. I can't see that. Banks just want their money back and an insertion of management would not be for the purposes of a business turnaround. It would be to liquidate in an orderly fashion.

If there is a breach of covenant and it leads to something material, it will need to be reported some time in mid-January after the half-year review. This is the time when any breach would occur and any remediation would be announced. After this, a major source of uncertainty is removed.

Valuation:

Nothing complex is required here. The company was floated at about $200m (much more, but I'll cut this stub off to start harsh). Half of it was BAWM. Assume a total write off. The other half has Ebola. It's now worth $50m.

In the recent period, the company acquired Real for $57m and Endeavour for $84m.

It has net debt of $55m (let's use UBS management call figure of $65m). That's from a fully drawn facility of $123m. So they've got cash outstanding of $58m balanced against $123m in debt. Let's say the business actually needs cash of $20m which was what is was at FY2014 (but this was actually excessive - another harsh move). Endeavour had virtually none. In other words, stable long term debt is $85m at present. But, there as been a draw on cash because of the restructure that has caused mistiming between earnings and cash in H1. That was worth $20m....so we go back to long term to $65m. Still with me?

Let's blow out the litigation figure. They're completely toast. It would be an Australian banner case and we should buy shares in Slater & Gordon as a pair trade. $50m with no recovery.

Franking balance is worth $5m or so. They aren't going to be distributing that in a hurry, but it is an asset that an acquirer would get.

Total asset value based on acquisitions, assuming BAWM is rubble and the rest at IPO is 50% is worth $50m. Real and Endeavour are worth $138m. Add $3m for the chump change.. The total asset base is $191m based on purchase prices in the last 18 months. About half of this was within the last 7 months.

Nonetheless, let's go bongo. The liquidation value is 67% of the impaired purchase price (per above). Busted asset value is $123m. Take off $50m for Australia's most successful litigation case of the decade and decade to come. We get $73m.

Take off stable debt on harsh cash assumptions, we get $8m. Add franking....and our valuation becomes $13m. That is what the company is worth if the sky fell on it. Got up. And fell on it again, this time from the top turn-buckle. The bankers would be made whole. There would be 30% recovery for equity holders.

Armageddon.

On the same basis where we work on central case valuations based on recent transactions and, say, 2/3rds impairment of non-BAWM and 80% impairment of BAWM (close all the myVocation bit and a chunk of the RTO bit), central case litigation of $10m...everything else as is...we get: like...$190m

So, if there are only two states of the world...Impaired IPO Value ("IAV") and Liquidation ("BLACK TOAST"), the current market valuation is pricing in an 85% chance of BLACK TOAST. Maybe. Maybe not. Could be some upside methinks.

Anyway, I picked up some more. I'll look at it again in January. Whatever happens, I can say I was educated by the College of Natural Health.

 

[VSntchr]

More information on the Vocation story today.
$35m in debt shaved off by paying down from cash balance, but the big thing to note is they state: FULL SUPPORT OF BANK GROUP.

No dividend coming up - as expected.
Potential intangibles writedown - also pretty much expected.

 

[galumay]

but the big thing to note is they state: FULL SUPPORT OF BANK GROUP.

Agreed, that goes a significant way to mitigating the catostrophic risk IMO, happy to continue to hold and see if there is a turnaround story in there somewhere!

 

[craft]

More information on the Vocation story today.
$35m in debt shaved off by paying down from cash balance, but the big thing to note is they state: FULL SUPPORT OF BANK GROUP.

No dividend coming up - as expected.
Potential intangibles writedown - also pretty much expected.

Warning – devil’s advocate post.

I bet they wouldn’t have paid back the 35M if the bank didn’t force them to.

Companies always say they have full support – until they don’t.

You will only find out that they don’t during the trading halt that puts them into administration. (If it goes that way)

We can argue about the probabilities of the bank pulling support, but I don’t think it’s reasonable to say there is no risk of that happening.

The class action around the last raising is the real risk issue in this case. Was it valid could it be unwound in its entirety if management withheld information? What’s the probability of outcome. What’s the probability of magnitude What’s the insurance cover detail? Does it exist, what is the excess, does it cover fraudulent / deceitful actions? Where will a successful plaintiff’s claim fall in relation to the banks claims? Most importantly,what does the bank think of all the above? – They are unlikely to wait for a trial outcome to secure their debts if they think there will be a large negative outcome. VET will be in breach of their covenants so the banks have ultimate control.

I’m not saying don’t take an informed risk. Just that’s its pretty binary bet at this stage with one leg being 100% lose – position size accordingly.

 

[DeepState]

Warning – devil’s advocate post.

I’m not saying don’t take an informed risk. Just that’s its pretty binary bet at this stage with one leg being 100% lose – position size accordingly.

+1. Thanks.

---- below was written previously whilst out of range ----

Just before Christmas (can you believe it), VET-AU announced the outcomes of negotiations with its banking consortium. Excess cash above $20m (the amount assumed in the BLACK TOAST scenario as being a comfortable cash holding) was applied to reduce the outstanding balance and bring the facility down to $85m, now regarded as fully drawn. This is in-line with the balance sheet estimates for tangible cash assets as previously posted. The lack of borrowing capacity in a gross sense does not impact the break up valuations. It does impact cashflow buffer for ongoing concern valuations.

Key points for me:
⦁ This stock remains deeply troubled but has passed a major hurdle in the near term.
⦁ The facilility was in breach. The bankers ran the show.
⦁ The bankers could have cleaned their clock...but did not. There isn't even any mention of punitive interest rates. Surely this would have been mentioned if so??
⦁ They did have a cash balance as per BLACK TOAST, confirming a key aspect of underlying financials under a disaster scenario.
⦁ They must have positive cashflow expectations sufficient to satisfy the bankers or the facility would have been jammed right now.
⦁ The facility remained essentially fully drawn in terms of net cash as it was previously and available despite knowledge of two class actions outstanding. The bankers would know more about this than the public at large. The bankers remain in place.
⦁ Management went fully drawn in terms of the gross exposure, increasing excess cash balance, to try and keep the facility at maximum knowing that something was going badly wrong. This simple rouse was reversed by the bankers.
⦁ They will take a stack of non-cash write-downs as expected. This will be factored into the facility arrangements so reported earnings hits will not lead to another facility setback unless driven or accompanied by a deterioration of underlying EBITDA. There would be a credible plan to protect debt providers in the near term at least. It will be interesting to see how much they write down things. If it is worse than the figures implied by the BLACK TOAST scenario, a review of the ashes of this stock will be required as the existing thesis will be revealed as horse manure under the light cover of analysis. The (step towards the) truth will be revealed along with a reduction in underlying EBITDA guidance in the New Year. I suspect they will go hard at expense reduction and take another set of one-off charges associated with workforce reduction. The figures did not suggest the H1 cuts were that deep and were hoping for a recovery rather than reflecting the new, more likely, baseline.
⦁ Dividend has been cancelled, as you would expect in this situation, to preserve cash. A good move, if obvious. At least it wasn't a bad move.
⦁ This all occured as the CFO was in the process of leaving the firm and a temp replacement was being blooded in under fire. I'm sure the queue for the permanent position stretches around the campus - hehe. It is hard to say if he was pushed or resigned under pressure from the bankers. Probably found it all too much and pulled the pin.
⦁ They will be forced to cash drain the business with essentially no reasonable scenario for further acquisitions at any valuation. Excellent. It clarifies the valuation proposition. I wonder, though, if sales of existing busineses are in planning. If these are tested and are favourable, expect a massive rally. I'd say the scenario should be a live one under consideration and bids might be forthcoming.
⦁ This disaster story remains intact...but is one that continues to live and breathe and is largely free to roam within an organic growth environment. Furthermore, its shortcomings are beginning to be better understood. This is a major piece of uncertainty that has been passed. That is far from saying the coast is clear and this is a blue ribboned ride to a multi-bagger.
⦁ Management remains in place. We are not in a liquidation/administration scenario. That's saying something. OK for now - on a short leash. I still feel that there is a degree of alignment between bankers and equity in this situation and am much more relaxed (if that's the word) than I would be for a high tangible asset situation where I would just write my investment off and move on. Right now, the bankers are forcing management to act in an equity friendly manner.

 

[Triathlete]

More information on the Vocation story today.
$35m in debt shaved off by paying down from cash balance, but the big thing to note is they state: FULL SUPPORT OF BANK GROUP.

No dividend coming up - as expected.
Potential intangibles writedown - also pretty much expected.

You know what the rule of thumb says: If a company stops paying a dividend it is time to get out!!
Let them sort there mess out first, then get back in....maybe.

 

[ROE]

Close to 1 bagger since the last low ...more to go

 

[ROE]

You know what the rule of thumb says: If a company stops paying a dividend it is time to get out!!
Let them sort there mess out first, then get back in....maybe.

General true but depending on the business ..
FLT stop paying dividend when it was $4ish during the GFC ....
CCP reduce dividend next to nothing and people said it going bankrupt when it trades for $1

While everyone bailed out, directors buy in, the rest is history

 

[Triathlete]

Close to 1 bagger since the last low ...more to go

Congratulations on your 1 bagger

Unfortunately I am not much of a speculator and a company that loses 86% of its value and stops paying a dividend does not give me much confidence at this stage although if it closes above 29c it may confirm a short term uptrend has commenced wait and see....good luck with it anyway.

 

[galumay]

Close to 1 bagger since the last low ...more to go

LOL! yes, i put some in at 19c so pretty happy when it tipped 30c today, we are a way form being out of the woods, but the deal with the banks helped the cause.

It looks like another case of the irrational market mispricing a change in the fundamentals, hoorah for that!

 

[galumay]

Some serious buying by 2 entities in the last few days, no doubt that volume has helped push the price along. Mayfair Management and Gerhana, not sure whether they are holding companys for directors?

 

[skc]

If there is a breach of covenant and it leads to something material, it will need to be reported some time in mid-January after the half-year review. This is the time when any breach would occur and any remediation would be announced. After this, a major source of uncertainty is removed.

In trading halt today pending a trading update: looks like you are getting the timing right. Let's see what the outcome is.

 

[TPI]

DeepState, interested in your thoughts on this now they are in suspension? Can any good come of this?

 

[JTLP]

DeepState, interested in your thoughts on this now they are in suspension? Can any good come of this?

Now I'm not DeepState..but this doesn't sound too good:

Vocation has extended its trading halt to January 28 at the earliest, pending a board meeting “to evaluate the progress of the financial reviews and discussions with its financiers” which is scheduled for January 27.
Even then, the troubled education services provided noted in its ASX statement this morning that “the significant nature of the reviews underway and the discussions with financiers means that the company will only do so [make an announcement] if able on a fully informed basis”.

Read more: http://www.smh.com.au/business/mark...day-of-2015-20150121-3oj1f.html#ixzz3PRrtUjwC

 

[DeepState]

DeepState, interested in your thoughts on this now they are in suspension? Can any good come of this?

Theoretically, it could. In reality? The fact that they have ongoing issues with their finance arrangements so soon after the last announcement is weird. Weird, as in, not good. It was only a month ago that the facility was adjusted. Less. They will have to take some massive write-downs so a suspension pending such a material announcement would have been reasonable, especially given that they are a target of two class actions for not providing adequate disclosure.

All this hangs off the debt arrangements. It's a big X factor with class actions being the next. We have next to no visibility on the detail of the debt so the range of possible outcomes is wide. They have not mentioned the class actions, but these take years to sort out. I still think the coin is loaded to heads, but tails could easily be pulled.

The following is some blather for your amusement ahead of the announcement and possible re-listing in a week:

• If one member of the syndicate pulls, the others are toast. So any move tends to be coordinated;
• Perhaps there was some sort of misrepresentation made by the company to the financiers that has come to light. The arrangements were being reviewed as the CFO quit and a new guy just started. Stinkers take a little bit of time to emerge and the new guy does not have to carry the can for past misdeeds. If this occurs, the former CFO should be sued and jailed. However, we will take a hit;
• If all was as presented in Dec then what we are looking at here is different. It could relate to creating additional credit lines perhaps (outside case). More central will be the write downs for earnings expectations and carrying values. It is possible that these are so horrendous that they need to go back to the bankers again in a negative sense (more likely). Most central is that this was always in the planning. If I was their banker, I would do exactly this...tighten the surplus loans facility, keep the existing in place given expectations of positive cash, and review the situation at every material development. A material development is the determination of the carrying values of businesses and revised guidance. So, in many ways, why is this surprising?

The thing I am most concerned about it that the cash drain is worse that anyone had been saying or assuming three weeks ago. That is Armageddon. Otherwise, if the issue is mostly non-cash write off, it should be ok.

With the start of a new year, course intakes would be gaining visibility and maybe these are not favourable. This is the contagion scenario. I had checked up on this but, who knows? More data arrives and you do what you do.

What I am looking for is a scenario where the bankers force these guys to cutting out the parts of the businesses which have become smashed and forget about rebuilding them. The last data announced suggested some sort of meaningful rebound was hoped for. Then, milk cash from the business. Don't buy anything new.

What could happen is that the bankers are not comfortable and will choose to liquidate. The alternative which was discussed in my investigations is that they will sell their debt to a hedge fund or some other specialized work-out vehicle. They will sell the businesses as running concerns where possible. Shuttering is not sensible.

Let's wait and see. For me, the position is speculative and sized accordingly (you'd laugh). Anything can happen including total write-off. We might be getting a VET-style education yet not be in line for a refund. Whatever the case, we can't trade it! However, we could form an ASF grey-market.... shall we say 12.5/20?

 

[TPI]

Thanks DeepState, what are your thoughts on a capital raising to wipe out the debt and increase working capital?

I was thinking that the significant shareholders and institutional level shareholders, who are already heavily invested in the stock, would be likely to support it even if somewhat reluctantly, as it may help support the value of their shareholding by giving the company greater financial flexibility to trade out of their current predicament.

If they didn't support it they could potentially say bye byes to their stakes in the company if the financial situation gets worse and the banks decide to close up shop?

Here's something below from Morningstar showing the heavy substantial shareholder buying in recent months.

The Future Fund and IOOF are still listed as substantial shareholders.

 

[DeepState]

Thanks DeepState, what are your thoughts on a capital raising to wipe out the debt and increase working capital?

I was thinking that the significant shareholders and institutional level shareholders, who are already heavily invested in the stock, would be likely to support it even if somewhat reluctantly, as it may help support the value of their shareholding by giving the company greater financial flexibility to trade out of their current predicament.

If they didn't support it they could potentially say bye byes to their stakes in the company if the financial situation gets worse and the banks decide to close up shop?

Here's something below from Morningstar showing the heavy substantial shareholder buying in recent months.

The Future Fund and IOOF are still listed as substantial shareholders.

I think it is possible for a deeply discounted equity raising to take place in that scenario and not for expansion purposes. Certainly, I would take up my allotment as I think the financial uncertainty relating to the debt arrangements is causing a huge discount to the price. If not diluted, I would gladly take out this uncertainty. I hope they do it. It would not be adequate to have one of those accelerated insto placements only so it would come to retail as well. It would be one of those 1 (or more):1 style recapitalization fund raising efforts. The prior retail placement was scrapped as the price fell away.

Really, this is probably happening because the H2 FY15 will report yet another EBITDA loss as opposed to the previous expectation which was total BS. This is expected. Some sort of suspension pending announcement of the review and the H1 results was always on the cards. The key part that pisses me off is the continued mention of a potential revision to debt arrangements so soon after the last one was announced only 3 weeks ago. That's almost as bad as the SNB announcing the peg would hold and then breaking it a couple of days later. Except not quite as systemically important.

The key question is what is the underlying cash expectation. Everything hangs off it. This business is almost entirely variable cost, so it is within their control to cut and cut until this is achieved. Even if it is the detriment of long term value to survive the cash requirement, that's what they have to do. The belief being that it doesn't destroy the entire franchise as some of it must surely be alright. Will they do this though? The bankers will force them, I think.

Future Fund and IOOF are essentially fund of funds so it won't generally be them which decides whether to participate as this is delegated. Still, as a number of directly significant insto managers dumped their holdings, it is interesting to note that underlying that are clearly some managers who are accumulating though not yet required to make substantial holding disclosures.

In my investigations, certain leading credit managers suggested a scenario would be the appointment of a new CEO who comes in on the basis of a capital raising and a slash and burn agenda as per my preference. Anyone up for the challenge? I'd say this is a very viable scenario too.

There was an article written in The Australian today about VET-AU. Looks like they have stuffed up again with an attempt at re-branding. Oh, the pain. However, they had nice things to say about the new CFO - albeit he is currently only temporarily filling this position at present. A couple of other articles just repeat the news release.