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3 bargain small caps to profit from the education sector

The VET-FEE-HELP sector has been through a torrid time since late 2014, as government cuts and tighter controls kicked in to end rorting. Amongst the quoted stocks Vocation and Intueri have both gone under, as have countless private providers.

However, in this article I highlight Academies Australia Group Ltd (ASX: AKG), Redhill Education Ltd (ASX: RDH) and Ashley Services Group Ltd (ASX: ASH) as worthy of investor attention.

Now rebadged as VSL (VET Student Loans), there are signs that things have bottomed in the sector. The move by State government departments, such as Victoria, to hand out only one year contracts is now being reversed.

This is not only due to pressure from providers but also  due to the administrative burden on local departments. The new Victoria tenders are for two years. This will give providers much needed visibility.

The other thing, of course is that although VET-FEE loans shrunk last year to only $1.5 billion, there are far less competitors to share the pie, and those who survived will now have far more rigorous systems in place to take advantage of it.

The demand for vocational training has not gone away, so I see the market quietly growing over the next few years.

So which stocks do I expect to benefit?

Academies Australia Group Ltd swung from a loss of $4m to a profit of $3m in the last year. The current year should see further improvement in revenue and margins. It’s worth noting that directors have been substantial buyers.

Redhill Education has already delivered a 158% jump in 2016/17 EBITDA to $3.9m and a return to the dividend list. The Company expects profits in the first half of 2017/8 to be significantly ahead of last year.

Ashley Services Group had a torrid time in its Training Division over the last two years. Luckily it had a substantial Labour Hire business to see it through. Training is now making a small profit, but that will change if its tender in Victoria is successful.

Foolish takeway

As confidence returns to a battered sector, I expect a more predictable future for those players that remain. That is not reflected in the share price ratings of the stocks listed above.

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Motley Fool contributor James Middleweek owns shares in Ashley Group Services Ltd. 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.