The last few years will be remembered for the meltdown in the Australian vocational education and training (VET) sector. Listed operators Vocation Ltd (ASX:VET) and Australian Careers Network (ASX:ACN) failed, as well as a raft of private operators, and concerns linger that more will follow. Shareholders of the surviving operators have endured share price declines of 40-80%.
As funding models like VET-FEE-HELP used to offer a full year’s tuition paid up front to the provider, growth could be easily obtained by boosting enrolments. Deceptive operators took advantage of this with unethical student recruitment practices and poor course delivery. Describing the scale and severity of the issue, a journalist recently noted:
“The government is spending four billion dollars, most of which ultimately may well end up being wasted”.
The sector has undoubtedly caused an incredible amount of waste, but to assert that no students will benefit from its existence suggests that sentiment has become too pessimistic. And when extreme pessimism leads, mispricing follows.
Let’s not forget that education is a vital service for every economy and education businesses do have some favourable characteristics. They can be very profitable, with great cash generation through regular tuition payment and low asset intensity. And with a lower Australian dollar, growth may be supported by improved international student affordability. The transition to a sustainable funding model will be difficult for existing operators, but I see no inherent reason why operating conditions cannot eventually improve. Australia remains an attractive education destination. Quality providers of value-adding education should ultimately thrive.
The challenge is identifying the quality operators from the cowboys.
Every CEO will tell you they are scrupulous, but with supposedly reputable providers being discredited so frequently, it is hard to know who to believe. Intueri (ASX:IQE) described its strategy as one of “unrelenting focus on quality outcomes”, before an investigation was launched by the Tertiary Education Commission and later the Serious Fraud Office.
Instead of listening to what CEO’s say, perhaps it is better to take our cues from what they do. As the entire VET sector has been belted, it seems fair to conclude that if insiders believed in their businesses, a commensurate level of on market buying would follow. If I were to invest in the sector, it would only be alongside a CEO that believed in their own business, and was willing to back that conviction with real money.
To test this theory, I calculated the total amount of insider buying since the beginning of the VET crisis, pinpointed at mid-2014 when concern first arose about Vocation Ltd (ASX:VET).
20160512-IR-VET-Fig1
Every business except Redhill Education (ASX:RDH) and 3P Learning (ASX:3PL) have had some level of insider buying. The notable exception is Academies Australasia Group (ASX:AKG).
Since the onset of the crisis, its directors have purchased $5m worth. Even excluding their October 2015 rights issue, AKG directors have purchased over $2m on market, with $762k purchased in the first few months of 2016 by CEO Christopher Campbell and Chairman John Schlederer alone. Given the quantum of money it seems fair to conclude that insiders think AKG represents good buying at current levels. But what can we conclude about their investment skills?
Outside of acquisitions (where the expansion into the domestic market was admittedly mistimed), the only example of the pair’s investing prowess dates back to 2011. Long before Pie Funds and The Boat Fund joined the register, AKG purchased 11% of Redhill Education (ASX:RDH). CEO Campbell and Chairman Schlederer also both took sizeable personal stakes, with RDH’s share price at $0.11 when the purchase was disclosed. With RDH now trading at $0.80, it is up over 7x today, and was up over 13x at its peak. While a single investment does not allow us to conclude definitively about someones investment expertise, it does provide a precedent of the pair backing their convictions, and being proven right over time.
These factors suggest that AKG insiders have conviction in the future of their business, a rarity in the VET space. This provides a good starting point for further investigation. While it is still early days in the wash out, we suspect the future will be guided in line with Jeremy Grantham’s prescient words:
“… be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”