The New Criterion: listed education stocks learn their lesson

Tim Boreham

The survivors in the listed vocational education sector are licking their wounds from recent controversies and nourishing young minds. The government is loosening its funding purse strings, too

Redhill Education (RDH) $2.95

As the head of one of only a handful of surviving listed vocational education colleges, Glenn Elith spends much of his time educating investors on why Redhill is not like its fallen comrades.

Think of the hapless Vocation, the Australian Careers Network and Intueri or the private Sage Institute, Acquire Learning and Careers Oz.

These colleges fell victim to the government’s belated crackdown on the rorted VET Fee Help loan scheme, which saw providers signing up students to woefully inappropriate schemes (often with inducements such as free laptops).

At the height of the scheme in 2016, 400 colleges signed up students to $2.6bn of government loans, with the students often unaware they would be on the hook for repayment whether or not they finished the course.

The scheme was replaced with the Vet Student Loans program, which includes much tighter criteria and capping of places per institution.

As a result, in calendar 2017 just $192m of new loans were approved across 54 accredited colleges.

“It’s been a success from a regulatory point of view because they have tackled the cowboys,” Elith says.

While affected by the stench emanating from the sector in the past, Redhill derives less than 5 percent of revenue from government-funded domestic vocational sector, the main source of the problems.

Redhill still derives more than half its revenues from its English language college Greenwich, the country’s biggest provider.

Redhill also has an international student sourcing agency Go Study Oz, with outlets in Europe and South America (including Bogata, given Colombia is the fastest growing market)

Redhill last year opened a technology and design faculty that offers millennial-friendly courses such as computer coding, digital design and a bachelor of mobile app development.

In 2015 the Sydney-focused Redhill opened a greenfields campus in Melbourne’s CBD, which has doubled in size.

Overall, Redhill’s students are split 50/50 between international and domestic, with most of them paying out of their own (or their parents) pockets in advance.

In the case of the offshore students, failing to pay a semester in advance will result in their visa being revoked.

Given the company’s main debtor is the most reliable in the country – the government itself -- that makes for a great cash-flow business.

Despite its own issues with visa chasers and dodgy courses, Elith says the foreign student market remains strong. One reason for this is that students have been scared off studying in the UK because of Brexit.

Students – especially Canadian ones – have also shunned the US because of Donald Trump (who announced a travel ban on the residents of seven countries).

“We were a little bit cheeky playing up the impact of Brexit and the same applies to the US market,” Elith says.

Redhill’s financials were affected by the cost of starting the Melbourne campus and new courses in 2016-17, but the first (December) results for 2017-18 showed cleaner numbers.

Net earnings grew from $100,000 to $1.4m, on a 44 percent revenue surge to $25.9m. Of the ebitda of $2.7m, $1m came from the new technology and design courses

On Select Equities’ educated guess, Redhill will post a $3.6m profit for the full year on revenue of $55m.

The firm believes the Melbourne campus could account for 30 per cent of revenue “and reach a point of sufficient occupancy, scale and maturity by 2018-19 so that it no longer detracts from margins.”

Elith said Redhill earlier looked at “dozens” of acquisition opportunities, but he was dismayed at the valuations.

“Vocation listed on ten times forecast post-synergy earnings and they wondered why their balance sheet was in distress.”

“I was accused by the investment community of being too cautious but I stuck to my guns.”

But there are signs the pendulum has swung too far, with the government funders now more willing to increase fee caps for the virtuous survivors.

“There’s a huge disconnect between demand for skills-based training and supply,” he said.

“The small number of providers left will get first-mover advantage when the boot goes off the neck.”

Redhill, meanwhile is eyeing expansion into vocational areas such as healthcare and social services.

Elith says the board has an open mind on whether this will be organic expansion or through acquisitions.

With valuations now returning to saner and with dozens of acquisition proposals crossing Elith’s desk, don’t be surprised if Redhill picks up a morsel or two among its surviving cohort.

Academies Australasia (AKG) 47c

The nearest listed rival to Redhill, the 109 year old Academies offers 250 qualifications across 18 separately-licensed colleges here and in Singapore.

While three of its colleges are accredited for VET student loans, 70 percent of its students are from overseas. The courses include agriculture, nursing and hospitality.

Academies reported a $1.92m first-half profit on revenue of $29.7m and appears confident about international demand.

But the low-key company doesn’t say much, it’s hard to know.

Academies in 2011 acquired a 10 per cent stake in Redhill, but disposed of this stake last November for $4.58m ($1.89 a share).

One theory is that Academies bought the shares on the assumption that it would be in pole position to pick up Redhill assets if Redhill had foundered (it didn’t).

Our preferred thesis is the simple one: having acquired the Redhill shares at 13.6c, Academies crystallised a stonking 1200 percent gain.

As well as using the funds to reduce debt, the board shares the love around with a 1c a share special div.

Another vocational survivor is iCollege (ICT, 5.5c), which offers nursing, aged care, hospitality and building and construction courses.

With an eye to emerging trend, iCollege has also moved into blockchain technical training.

iCollege reported a December half loss of $609,400 on revenue of $888,700 -- which explains why the shares trade in penny dreadful territory.

Still, the shares changed hands at one tenth of a cent three months ago and the stock still commands a $23m market valuation.

In comparison, Redhill is worth $89m and Academies bears a $62m market cap.

Another one to watch is the $15m market cap UCW (UCW, 19c), which is oriented to international students and offers courses in disciplines including dance, remedial massage, marriage counselling and aged care.

At the more rarefied end of the private education sector, the $1.8bn market cap Navitas (NVT) focuses mainly on pathway courses for foreign students embarking on a degree course.

But Navitas’s valuation is pipped by that of the $1.88bn IDP Education (IEL), a student recruiter half owned by a group of universities.

IDP recruits offshore students for the member unis, bearing in mind that the sandstone colleges are the destination of choice for wealthy Asian students and their parents who foot the hefty bill.

IDP also runs English language colleges in Thailand, Cambodia and Vietnam.

Redhill competes with both in the English language sector, but only is exposed to the lucrative higher education sector through its Go Study arm.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

ENDS


Tim Boreham

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

Expertise

australian small caps rdh:asx akg:asx ict:asx ucw:asx nvt:asx iel:asx

Comments

Please sign in to comment on this wire.