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It takes a brave investor to buy into a sector where companies are collapsing, regulatory risk is high and sentiment stinks. Or to take a favourable view of a company, such as Intueri Education Group, which has been investigated for fraud, suspended its dividend and has an interim CEO.
Conservative investors should stop reading now. As should those who detest the troubled vocational educational and training (VET) sector or were burned by the collapses of Vocation and Australian Career Networks. This is no sector for inexperienced investors or the risk averse.
Some rogue operators in vocational education badly damaged the sector’s reputation by rorting a system that had become a government-funding honeypot. On some estimates, the Commonwealth lost more than the $2 billion because of the growth in funding for VET education. 
Federal Minister for Education Simon Birmingham this month said there were more unscrupulous operators in VET education than previously recognised. Companies had used aggressive sales tactics, such as offering free iPads, to sign up students, only to provide shoddy education or in some cases none at all. It was a giant rort for fraudsters. 
Google “Vocational Education and Scandals” and there are many pages of stories about unscrupulous operators and the disasters of Vocation and Australian Careers Networks, two former high-flying stocks that took on too much debt and crash landed. 
Intueri was caught up in the carnage, partly through its own making. 
In November 2015, an Intueri subsidiary, the New Zealand School of Outdoor Studies, pleaded guilty to one charge laid by Worksafe NZ relating to a student fatality in April that year. 
A month later, Intueri was notified by the NZ Tertiary Education Commission that two of its schools, Quantum Education Group and the NZ School of Outdoor Studies (its dive school), were being reviewed. One review has concluded and the other is expected to do so in the second half of 2016. 
In January, Intueri was notified by the NZ Serious Fraud Office of an enquiry into the Quantum Education Group. By February 2016, Intueri had announced sharply lower earnings guidance and suspended dividends. In August, its CEO stepped aside. 
Speculation was rife earlier this year that Intueri would be taken over.
The share price told the story. From $2.90 in September 2014, when VET stocks were raging, Intueri has slumped to 30 cents. Intueri raised $57 million in an Initial Public Offering on ASX in May 2014 at $2.16 a share. Now it is among the market’s worst IPOs in years.
Chart 1: IntueriSource: The Bull 
Which brings me to Intueri today. At 30 cents, Intueri is capitalised at $30 million. In its latest half-year earnings report, released in August, the company said underling earnings (EBITDA) for the full year to December 31, 2016 will be about $15 million, subject to funding-cap confirmations, from $23.5 million a year earlier. 
For all its challenges, Intueri continues to trade profitably and is implementing a number of cost-saving initiatives as it fixes the business after a horror few years.
The question is debt. Net Debt of $72.6 million is big risk, although Intueri has renegotiated its banking covenants and directors believe additional headroom could be renegotiated or the capital base restructured if conditions deteriorate. The Going Concern commentary (Note 2) in the half-year report outlines the assumptions behind the directors’ view in this regard. 
Intueri says it is focused on servicing and reducing its debt. It should be. There is not much wriggle room if student enrolments fall further, for longer, than expected. Net Debt of more than four times expected underlying earnings leaves Intueri vulnerable to further regulatory shocks. 
Equally, Intueri could pay down debt faster if the VET sectors in NZ and Australia stabilise and there is more regulatory certainty – something that is still a way off.
Amid all the gloom, VET has a vital role for industry because it is a more agile part of the education sector. The Committee for Economic Development of Australia (CEDA) said as much in its recent analysis of the VET sector and called for a wide-ranging review, including better regulation. 
If anything, the Federal government needs to focus more on restoring the VET sector’s reputation and encouraging students who are not suited to university to pursue such training, provided the industry is cleaned up and free of rogue operators. 
Contrarians might consider Intueri at current prices: the valuation has factored in so much bad news – and perhaps an expectation that Intueri could struggle with it debt if things do not go its way. But $30 million for NZ’s largest VET provider, in a sector that should have good long-term growth prospects if it can get its act together, is low.
The best strategy is to watch for signs of stabilisation and debt reduction in Intueri – and a clearer regulatory response. Better to give up early speculative gains and wait for certainty that earnings are rising, debt is falling and a new CEO, when appointed, is resetting the business.
Chartists will watch closely for any sustained breakout above 35 cents after a long period of consolidation or side-ways price movements. 
Intueri will be a lot higher than it is today if the turnaround succeeds. But this one is fraught with challenges, will take time, and finding an immediate re-rating catalyst is hard work. Still, Intueri is worth keeping an eye on for those who seek speculative turnaround situations – about as risky as it gets in microcap land. 
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Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at August 31, 2016