Vocation Ltd shares plunge 57%: should investors jump in?

It might look cheap but investors are betting that students are turned off Vocation Ltd (ASX:VET).

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published October 29, 2014 8:57 am AEDT

Vocation Ltd (ASX: VET) returned to official quotation on Tuesday after the company spent three days in a trading halt while negotiating a settlement with the Victorian Department of Education and Early Childhood Development (DEECD). The result? A 56.55% share price fall!

$20 million funding cut

The outcome of the negotiations was that Vocation would surrender $19.6 million in government funding to two of Vocation's Registered Training Organisations (RTOs) in Victoria, BAWM and Aspin. The company will retain $9 million in funding from the Victorian Government for the two RTOs that were not under review.

Amazingly, as recently as 18 September, Vocation stated that "neither the review nor its anticipated outcomes are expected to be material to Vocation". This followed statements on 25 August 2014 and 10 September 2014 of the same nature.

Material Earnings Hit

Vocation's CEO Mark Hutchinson predicted that EBITDA would decrease by between 10% and 15% compared with the previous estimate of $64 million. If the company achieves the new range of $53m to $57m in EBITDA for the year to June 2015, the shares are currently trading on a PE ratio of around 10 (although this basic calculation assumes a similar EBITA to net profit ratio as last year, which could be complicated by writedowns).

Questionable Management

Mr Hutchinson noted that "there will be a short-term impact from an earnings point of view, but we've decided that we'll be de-risking the business." The review found that the company had relied too heavily on the use of third party providers that essentially 'followed the money', which resulted in "some students being enrolled in inappropriate courses for their needs" and "some students experiencing a lower quality training experience than intended for their job seeking needs".

This is certainly a bad look for Vocation, and while management doesn't expect its reputation to be damaged, it's hard to believe that could be the case. Shareholders appear to agree, selling in droves on the highest volume since listing in 2013.

There could be a bounce on Wednesday, but it's hard to believe that the company can quickly recover.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.