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

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.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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