Small Caps | Feb 25 2014
-Strong increase in enrolments
-Well placed to repeat Victorian success
By Eva Brocklehurst
Education business, Vocation ((VET)), has not yet been listed long enough to require an "official" interim profit report, but the company has posted an "update" in lieu which basically amounts to the same thing. Vocation delivered a strong beat to expectations in its first report as a listed company. Brokers believe prospectus guidance will be easily met, or even exceeded. Revenue of $58.9m represented 49.8% of prospectus forecasts, compared with guidance of 40-45%.
UBS was pleased with the result, with positive revisions to forecasts primarily reflecting an increase in expectations from the solutions division – ancillary training for government clients and registered training organisations. Student enrolment has been strong across the group and the broker thinks this should be the focus for investors as it is the largest driver of future earnings. The broker considers the stock cheap relative to education peers and has reiterated Buy rating and raised the price target to $3.05 form $2.55.
UBS thinks significant commercial opportunities exist for those providers that are sensitive to the changes in government policy. Vocation's national footprint and multi disciplinary offering as well as diverse client base stand it in good stead in this regard. Risks for the stock lie in the same direction as the prospects, according to UBS. There is potential upside from government funding, as vocational training is an increasingly important recipient of government funds, and the downside is represented in the potential for a reduction in course fees.
Moelis notes the foundation company's success in Victoria, where the demand-driven funding has been instituted for vocational education, means the macro environment should be supportive for private providers in other states that are considering implementing the model. Moelis has set a $3.00 target price and Buy rating. The broker sees upside risk for earnings, especially given the potential for acquisitions. The company is seen having a first mover advantage to consolidate quality franchises, having access to equity and debt capital.
The company is well on the way to achieving prospectus forecasts, according to Macquarie. The broker also believes Vocation is well positioned to capitalise on the increase in demand for private sector services. The direct-to-individuals channel delivered $10.2m in revenue, representing 45.7% of FY14 forecasts. Online enrolments also grew strongly, an offering that is highly scalable in the broker's opinion, and there are also significant geographic and product expansion opportunities. The broker's price target is $2.65, raised from $2.50, with an Outperform rating.
Brokers have also flagged the fact the company's enterprise channel revenue, which delivers trading to corporate and government employees, will benefit from the roll-out of two major contracts and remains crucial to meeting FY14 forecasts. Macquarie believes this higher margin business will be the main driver of a forecast 29.5% earnings margin. Management has signalled an intention to accelerate the geographic expansion of RTO Edge, the outsourced management solution. The importance here, for Macquarie, is this is a very sustainable business, with access to annuity style revenue.
See also, Vocation Seen Offering Re-Rating Opportunity on December 16 2013.
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