Education is a beautiful business when it works. Fat fees, hefty annual increases, recurring income and high switching costs are just a few traits of high-performing education providers. Investors who have understood the sector’s potential have done exceptionally well.
Seek, Navitas, G8 Education, and the recently floated Vocation have starred. Vocation’s success, in particular, will encourage several other private-education companies to float in the next few years and finally boost the representation of education companies on ASX.
The sector has excellent long-term potential. Not-for-profit education providers, such as second- and third-tier universities, look like sitting ducks as technology eventually reshapes the sector.
Most universities have huge fixed costs because they insist on owning buildings, even though they are in the business of education, not property. They also have unionised labour forces that, at least for some universities, are inflexible and change resistant. When revenues fall, from less government funding or fewer students, their cost base will be too slow to adjust.
Technology will be critical. Hype abounds about the potential of Massive Open Online Courses to disrupt the higher-education sector. These so-called MOOCs, increasingly popular in the United States, are offered online through high-quality universities at no or low cost.
I’m not as bullish on MOOCs as some, and believe they will take longer to change higher education than their proponents argue. But the unstoppable trend towards online learning, in whatever form it takes, will surely increase competition and ultimately lower education fees.
Private providers will increasingly attack the fringes of a multi-billion-dollar education sector in much the same way internet advertising stocks targeted traditional media companies a decade ago. As incumbent educators struggle to adapt, insurgent companies will eat into their market share.
That’s the theory. The reality is a lack of investable opportunities and high valuations make it hard to gain exposure to Australia’s education sector. Once you get past Seek, Navitas, G8 and Vocation, the quality and size of education stocks falls significantly. Micro-caps include Academies Australasia Group, RedHill Education and Kip McGrath Education Centres.
A likely float of Sterling Early Education will also boost the sector’s numbers on ASX.
I’ve rated Seek highly for years, given its potential to link recruitment and education. People often take education courses in between jobs, or when a job is secured and new skills are needed. It’s a clever, low-risk strategy for Seek to leverage its distribution channels into higher education.
However, I struggle with Seek’s valuation at $17.33. There is a lot of latent value yet to be realised, especially through its Asian recruitment sites. But the market has got ahead of itself, making Seek best bought on bouts of share-price weakness.
Like Seek, Navitas also looks fully priced for now. It was an early mover in Australia’s international education boom, providing “pathway” courses that help foreign students secure a university after a year of education and language training. I can’t buy Navitas at $7.49, despite its strong record.
Early childhood education provider G8 Education is among the market’s more impressive mid-cap stocks. With hundreds of childcare centres in Australia and Singapore, it is superably positioned to benefit from long-term growth in childcare demand, and the preparedness of parents to spend more on early learning. It too looks fully priced after stellar share-price gains in the past 12 months.
Education and training provider Vocation has also rallied. After raising $253 million through a float and listing on ASX in December, its $1.89 issued shares now trade at $2.69.
I’m always wary of Initial Public Offerings. Most are best bought well after listing when there is more history and earnings to go on. Vocation was an exception. It has an excellent market position and reputation, it is well run, and has performed well since listing.
Its first report as a listed company impressed. Vocation is performing above expectations, based on its first-half result. Underlying earnings for first-half 2014 were $14.1 million, or 40.5 per cent of the full-year prospectus forecast, compared with guidance of 30-35 per cent.
Although it is due for share-price consolidation or a pullback, Vocation has further to run in the next few years, such is its growth trajectory. It looks the best-value education stock.
Among smaller players, RedHill Education took off last year after a disastrous sharemarket listing in 2011. I don’t know enough about RedHill to have an informed opinion, having only covered it briefly when it listed. Its latest half-year result improving solid revenue and earnings growth.
Kip McGrath has been a perennial disappointment despite a good brand and well-regarded service. Interestingly, a strategic investor from New Zealand, Pie Funds Management, bought a 13 per cent stake in February. Perhaps that investor can finally help Kip McGrath realise its potential – for all its share-price woes over the years, it still has promise.
Academies Australasia Group (AAG) has rallied from a 64-cent 52-week low to 96 cents this year. It operates licensed colleges in Australia and Singapore, and comes with a fasteners business. AAG has been a solid performer over the past decade.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 13, 2014.
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