Vocation debacle a lesson for rent-seekers and their investors

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Vocation CEO Mark Hutchinson. Photo: Nic Walker

“Australia’s Fastest MBA – Graduate MBA in Just 12 Months” says the ad. What next? Cut us a cheque upfront and we’ll give you an MBA in three weeks?

Without casting aspersions on “Australia’s Fastest, Most Affordable and Flexible MBA”, as we know little about the academic rigours of the course, the Australian Institute of Business is but one of hundreds of private operators in the vocational training industry, a sector which attracts some $9 billion in taxpayer funding.

The terrific thing about this industry, therefore. is that you don’t cut the cheque, the government does. You, the student, simply sign up. And so it is that a generation of high-margin rent seekers has been spawned. Many of the players earn a chunk of their sales not only by providing the coursework but by hooking the students. “Tick and flick” is the term.

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The most infamous is Vocation Ltd, whose share price crashed 57 per cent in one day last week on the ASX when it finally conceded it had lost $20 million in Victorian government funding. The Vocation debacle is a salutary warning to investors in other vocation and training stocks, indeed to any sectors which rely on taxpayer largesse, such as the IVF stocks or the salary packagers, that what a government gives, a government can also take away.

Yet there are broader implications for the ranks of listed rent-seekers.

Once they float on the stock exchange, they are visible. Their profits and their ways of doing business inevitably encounter scrutiny and scrutiny brings tension between shareholders, executives and those who might question the degree of government funding.

Vocation’s fall from grace is hardly good news for those broking similar offerings. Market talk has it that JP Morgan has been doing some pre-float funding for another training stock, Acquire Learning, which  finds students and matches them with courses and is said to take 50 per cent of revenue from a course.

Whether taxpayers would generally be happy with funding this arrangement for say a diploma of shiatsu is up to assorted government departments to decide.

But the profits for such operators, often gross margins in the eighties, will surely invite attention.

As one observer noted of the players in the training sector:  “Once a student exhibits an inclination to sign paperwork … don’t let them out of your clutches.”

Elsewhere, too, the levels of government funding will face inevitable scrutiny. The recent results from IVF stock and “market darling” Virtus showed earnings before interest, taxes, depreciation and amortis ation (EBITDA) of $60 million on revenues of $200 million; this for a sector where Medicare and private health insurers pick up well over half the cost of a typical $8,000 treatment.

According to the Huggies Australia website, Medicare rebates cover a portion of the cost of each treatment cycle by estimating a percentage of the fee which is to be paid back.

“This is normally 75 per cent of the standard fee charge.”

No price can be put on the birth of a child, so these funding arrangements are incredibly sensitive and difficult to formulate. But the impact of a change in policy can be resounding. Though Australia has one of the most generous enhanced fertility policies in the world, when the government put a cap on rebates in 2010, the number of IVF treatments fell for the first time in 30 years.

Besides the issues of public scrutiny and the sustainability of its business model, Vocation Ltd now faces a more pressing threat, legal action.

This reporter put detailed questions to the company about its Victorian contracts before its profit result in August, even including certificate numbers, only to be fobbed off. Norwas anybody from the relevant government departments such as Victoria’s Department of Education and Early Childhood Development and the federal Australian Skills Quality Authority prepared to comment.

A story was duly written about the speculation. The following day at the market briefing for its earnings release, Vocation executives gave assurances that everything was hunky dory with its state contracts.

Following coverage in The Australian Financial Review the next day, the group conceded some government payments had been withheld, but this was clearly not enough disclosure.

Despite the mounting evidence that there was a material disclosure problem with Vocation Ltd, UBS raised $74 million for the company on September 11. Both Vocation and UBS are now in the cross-hairs of plaintiff lawyers and litigation funders. Hundreds of millions have been wiped from the share price and those who bought or owned the stock in the absence of material contract disclosures may well have a solid case.