As a part-time lecturer in entrepreneurship, I see two sides to universities. The first is a powerful business model with high fees, recurring income, relatively high switching for students who change universities, high barriers to entry and, for now, arguably low industry competition.
The second side is an industry with high fixed costs, rigid workplace practices and organisation cultures, poor reward structures, and constrained ability to respond aggressively to new threats such as free or low-cost online education from global universities, some with prominent brands.
This suggests an industry ripe for disruption from aggressive competitors. When technology fundamentally changes where and how university students learn – and what they are willing to pay – the revenue of some universities will implode. Like other industries, they will be forced to cut more costs, but revenues will fall at a faster rate than they can slash expenses.
There are parallels between print media and the university sector. I recall a decade ago when print media executives said the internet would never replace newspapers. People would always prefer reading a printed copy than a computer screen – a dangerous view, if ever there was one.
Similarly, I have heard academics argue that students will always prefer face-to-face lectures and tutorials over the online version. Not true. Fewer students, at least in my experience, attend lectures these days and when they do, their smartphone, iPad or laptop is never far away. Done well, technology can greatly enhance the learning experience and make it more convenient, rather than detract from it. This change will happen faster than many think possible.
By and large, newspapers underestimated the revenue threat from online advertising, and overestimated the resilience of the business model in the face of sharply lower sales, just as I’ve heard some academics say Massive Open Online Courses are a threat only at the margin. That is true for now, but as technology rapidly improves, more students will be attracted to online learning.
I could go on with other parallels between higher education and industries that have been severely disrupted and reshaped by technology. As an investor, the key is to back the best insurgents who do the disrupting – education providers with much lower cost bases who make life tougher for incumbents.
Given these opportunities, it is surprising that the ASX has had so few specialist listed education providers. Thankfully, that is changing. Recent floats of Vocation, Affinity Education Group, Intueri Education Group and 3plearning have expanded the education sector’s representation on ASX, and I expect more education-related floats in the next 18 months.
They add to education stocks such as Navitas, G8 Education, RedHill Education, Kip McGrath Education Centres and Academies Australasia Group. Seek also provides education exposure, although its core business is recruitment.
I covered some of these companies for The Bull in March, and nominated Vocation as my preferred education stock idea. Seek, Navitas and G8 Education were described as fully priced at the time. Vocation is up about 20 per cent since March. Seek is down almost 10 per cent, Navitas has plunged a third after losing a key contract, and G8 Education is up 11 per cent.
Vocation is still my pick of the education stocks at current prices and has further to run. Intueri Education Group also appeals. It raised $57 million in an Initial Public Offering on ASX in May 2014 at $2.16 a share. After debuting at $2.49, Intueri has rallied to $2.58.
Like Vocation, Intueri has a strong position in vocational education and training – a sector I expect to benefit in coming years as more students opt for cheaper vocational training over high-priced university courses.
Intueri is the largest vocational education provider in New Zealand. It should benefit from stronger growth in international students taking vocational education courses – a trend that will offset growth limitation in its regulated domestic student market. Almost two-thirds of its revenue comes from domestic students, so there is scope to boost earnings through higher international student numbers. And it operates in a highly fragmented market, meaning scope to grow through acquisition.
Macquarie Equities Research has an outperform recommendation on Intueri and a 12-month share price target of NZ$3.25, which suggests a total shareholder return (including dividends) of almost 26 per cent. Its forecast Price Earnings (PE) multiple for Intueri is 13.3 times FY15 earnings. That looks reasonable for investors, given Intueri’s potential to grow faster than the market expects.
I like its long-term prospects and believe Intueri, Vocation and other high-growth education companies have potential for serious disruption in the education industry – and serious returns for investors over time.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply 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 July 24, 2014.
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