Academies Australasia Group Ltd gives another tough lesson to investors in education sector

Education services business Academies Australasia Group Ltd (ASX: AKG) added to the picture of a troubled for-profit education sector today after posting a disappointing full year profit update. The stock has dropped to near a multi-year low of 65 cents amidst thin volumes for a company with a market value around $42 million.

The group is now forecasting full year earnings of $2.3 million, compared to $5.6 million last year. The big drop has been blamed on a steep decline in earnings from a flat-lining Western Australian economy, corporate restructure costs and provisions over student refunds for third party courses that have been cancelled.

Despite the international and for-profit higher education sectors being identified as the next growth areas many listed education businesses have struggled to harness the tailwinds, just as they have in the tourism or agriculture sectors for example.

Take businesses like Vocation Ltd (ASX: VET) and Navitas Limited (ASX: NVT), both of which have demonstrated the risks of investing in businesses that are reliant on the largesse of the government, public sector, or universities. A single contract loss or failed audit can result in sudden and significant downturns.

Another education giant SEEK Limited (ASX: SEK) recently blamed “incomplete enrolments and very high withdrawal” rates at TAFE NSW as partly responsible for its profit downgrade. While it also conceded that Liberal government reforms on VET FEE HELP designed to stop the incentivisation of students to enroll on courses may also have a negative impact on certain SEEK Learning partners.

SEEK also recently announced it still hopes to put for initial public offer its 50% ownership interest in IDP Education in 2015. This is a business reportedly valued at up to $450 million, with exclusive rights to providing and charging for the lucrative IELTS tests, although the IPO is yet to materialise despite reports of it dating back to 2013.

In my opinion some of the problems in the sector mean many of the businesses in it are ones to avoid, despite the obvious growth appeal of the international education sector in Australia.

There are exceptions with SEEK more focused on the online advertising space, while Kip McGrath Education Centres Limited (ASX: KME) looks another well managed option.

Why risk investing in the education sector when you could buy gangbusters growth stocks on attractive valuations?

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Motley Fool contributor Tom Richardson owns shares of Kip McGrath Education Centres Ltd..

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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