Shares of Vocation Ltd (ASX: VET) slipped by more than 11% this morning, hitting a low of just 12 cents after the embattled education provider issued an update on its financial situation.
Vocation has experienced a disastrous run over the last nine months or so, sparked by a loss of key funding from the Victorian government followed by a string of earnings downgrades. A number of class actions have also been launched due to management's poor transparency which saw the shares hit a low of 6.8 cents – down 98% from their 52-week high of $3.40.
As a result of these issues, the company said that it is now expecting second-half earnings before interest, tax, depreciation and amortisation (EBITDA) to be between $1 million and negative $5 million, while EBITDA for the full-year is expected to be between $3 million and negative $3 million. Meanwhile, underlying revenue is expected to be $15 million for the period.
By comparison, pro-forma earnings were $36.1 million for the 2014 financial year, while pro forma revenue was $137.2 million. It exceeded prospectus forecasts on both measures.
Business strategy
In order to remain afloat, Vocation has been forced to sell off a string of non-core business units which has generated $85-95 million of gross proceeds. This has also allowed the business to reduce its gross debt levels to below $15 million, down from $120 million less than six months ago.
Below is a diagram showing the business' structure moving forward.
Source: Vocation update
Under the new leadership of Mr Stewart Cummins, the company has also implemented a five-point turnaround plan to help its recovery over the next few years. This will involve a revitalisation of the management team whilst also slashing the number of qualifications it offers from 106 to less than 60; the integration of systems and processes for improved control and efficiency; and the prioritisation of internal and external quality control and compliance.
Meanwhile, the core business will be relaunched under a new brand to help it to move on from the troubles that have plagued it over the last nine months.
Should you buy Vocation?
As can be seen in the diagram above, Vocation has significantly trimmed down recently and while it is confident that it can return to profitability under this structure, investors would be wise to watch from the sidelines until this has been proven.
In saying that, Vocation could be a reasonable turnaround opportunity at its current price of 12 cents per share. While it would be a very risky bet (one that most long-term 'Foolish' investors would normally avoid), investors with a high tolerance for risk could look to put a small amount of capital to work if they have faith in Mr Cummins' ability to maintain his reputation for turnarounds.
As is always the case however, investors should ensure they maintain a diversified portfolio, and ensure they only invest the money they can comfortably afford to lose in the possible event that Vocation is unable to recover over the coming years.
