Last year we posted a blog, 13 Dreaded Announcement Headlines, with our most notorious list of headings we’d rather not hear from companies.
Those headings are usually an attempt by management to obfuscate, euphemise or just avoid blame for bad news. But there was no mistaking the ominous sounding announcement from Intueri Education Group (IQE) on Friday, which was titled Notice of Serious Fraud Office Enquiry. The body of the announcement was bang in line with the title, one of Intueri’s colleges, Quantum Education Group, is under investigation for fraud.
They’re not the only business in the education sector to run into trouble with regulators lately. Vocation (VET) filed for administration this year, and Australian Careers Network (ACO) looks headed for a similar fate, both facing allegations of rorting government funding with inappropriate practices for enrolling students, poor course content and teaching standards. Intueri’s shares, just like peer Ashley Services (ASH), are down more than 90% from their highs, and it’s probably fair to ask why investors would place any trust at all in the beleaguered vocational education sector.
In hindsight it is so easy to see these businesses were dodgy, but a couple of years back it was a different story. With the government opening up the sector to private competition, these businesses seemed to tick every box. They had stable government contracts, fantastic margins, required little capital and had vast potential for growth. Investors welcomed them with open arms.
Reality has obviously fallen well short of expectations. So what can we learn as investors for next time? Unfortunately, it is mostly difficult to know what is happening on the ground. After all, everything you read from the company makes them look great, and a reputable education provider is often a wonderful businesses. It’s only later, when rumours start swirling in the newspapers, and announcements begin to dribble out about regulatory concerns, that it becomes clear business practices were unsound and students weren’t achieving great outcomes. By then the losses are mounting.
Instead, the lesson for me is simply to be wary of industries that suddenly erupt from a new government policy, particularly those that are virtually 100% government funded. The fact that students could enroll in courses, at no cost to them whatsoever, created an environment ripe for abuse. Without good evidence that the business practices are really beyond reproach, investors just need to be wary of these kind of circumstances.
If an industry is new, and it could potentially be rorted, you must be suspicious of a high growth business. Companies that grow fast can often shrink fast too, particularly when they rely on just one paying customer.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.