Far too few investors stop to think whether companies they invest in really earn sustainable profits.
And as investors in Vocation Limited (ASX:VET) have discovered, that can be a very expensive mistake. Yesterday, that company was placed into voluntary administration. Those investors who thought the company could endlessly profit from government subsidy of private education have seen their investment thesis backfire resoundingly.
Another company in the sector is Australian Careers Network Ltd (ASX:ACO), which saw its share price soar more than 170% in the last 12 months, before shares were abruptly suspended from trading on October 15 this year.
The "notices regarding non-compliances," that triggered the suspension came after an investigation by Fairfax that shone a light on the practices of brokers enrolling students in courses run by Australian Careers Network (ACN) subsidiaries.
Undercover footage supplied by Fairfax revealed a business culture that makes me very uncomfortable, and the Australian Skills Quality Authority wasn't blind to it either. It noted in a recent report that it "used the information published in the media to inform its regulatory strategy." To me, this is an example of how overly aggressive sales practices are an alarm bell when it comes to selling products that are subsidised by the government.
Aggressive growth then a trading suspension
Australian Careers Network listed on the ASX less than a year ago, in December 2014. Since then, it has grown revenues rapidly, exceeding its own prospectus forecasts by over 75%. The company's strategy involves selling courses that are supported by government programs.
At the company's AGM, Chairman Stephen R Williams said its strategy "led to our acquisition of Phoenix Institute of Australia (Phoenix) in January which enabled the Company to access the provision of higher education courses and adding new diploma courses on scope importantly accessing the VET FEE-HELP Scheme…"
And there's no doubt the federal government's FEE-HELP helped boost enrolments. "By widening our student base with VET FEEHELP Scheme accreditation," said Williams, "we experienced considerable growth in student enrolment numbers over the last six months…"
Should taxpayers be supporting Phoenix Institute students?
Australian Careers Network continues to update shareholders on its dealings with regulators, who delayed a number of FEE-HELP payments to the company's subsidiaries. On October 20, the Australian Skills Quality Authority (ASQA) stated its intention to cancel the registration of the Phoenix Institute. On November 24 ASQA confirmed it would revoke Phoenix Institute's registration as a training organisation. The next day, the company announced that the Commonwealth Department of Education and the ACCC have brought proceedings against Phoenix Institute.
While the saga is yet to play out, ACN shareholders ought to ask themselves if taxpayers are getting good value for money when they support students to study ACN courses.
For example, The Phoenix Institute offers an Advanced Diploma of Transpersonal Art Therapy, which can be completed within a year, for the price of $18,000.
To put that in context, that figure is somewhere between 50% and 75% of the cost a 3-year psychology degree at a good university.
But it is mighty steep compared to the $4,400 it will cost you to do a 1 year art therapy training course (not a government diploma) at the Centre for Educational and Clinical Art Therapy.
According to a promotional video from Phoenix Institute, its course provides "a really solid foundation about being able to offer creative and arts based activities to work with other people to enhance health and well-being." In that video, the Director of Studies says, "we don't deal necessarily with symptoms or diagnoses, rather we actually, really listen to the person…"
The fact is you don't need to do a $18,000 course to become an art therapist, or to learn to "really listen."
Foolish takeaway
Investors in fellow private education provider Vocation Limited have virtually lost their entire investment since regulatory scrutiny brought the company to its knees. Before investing in this sector, consider whether the government will keep supporting these companies. After all the Commonwealth will spend $3 billion this year alone on vocational education and training Fee-Help loans, while another $3 billion will be spent by the states subsidising certificate courses.
Is that sustainable?
