Intueri's perplexing Australian online education business

Intueri’s perplexing Australian online education business

With the recent Serious Fraud Office inquiry into Intueri Education Group (IQE) triggering a further share price drop of 44%, I decided to take another look into IQE to see whether this represents a deep value opportunity.

Investor scrutiny to-date has been on the issues relating to Intueri’s NZ businesses – and rightfully so given Intueri was predominantly a New Zealand business.

However, I am more interested in understanding the Australian online education business – Online Courses Australia (OCA), which should theoretically be quarantined from the troubles across the Tasman.  Based on the deferred consideration provision on Intueri’s balance sheet, I believe OCA will generate around AUD$9m of EBITA during FY2015 – or a little less than half of IQE’s FY2015 EBITA guidance.

So what do we know about OCA and how it’s faring? Below is an extract from IQE’s latest shareholder update:

Screenshot IQE

And how much of OCA’s EBITA is actually at risk during FY2016? We don’t know because Intueri does not break out Conwal Institute’s financial performance explicitly, the only guidance we have is from the 2014 prospectus:

Screenshot IQE 4

So it’s expected to be most of OCA’s revenue. Strangely, OCA is almost always represented as Online Courses Australia in investor materials even though Conwal Institute (the entity that actually offers VET FEE-HELP) generates most of its revenue. In fact, on the Intueri homepage there is only a single link to the Online Courses Australia website and no link or references at all to the Conwal Institute:

Screenshot IQE 5

Since we don’t have any clarity over the numbers, let’s look at Alexa rankings to get a gauge as to how popular the website actually is – given OCA is supposed to be a high growth online business: www.onlinecoursesaustralia.edu.au is ranked the number 20,772 most popular website in Australia (its competitors as stated in the Prospectus for comparison: seeklearning.com.au is at number 1,722, www.open.edu.au is at number 578 and www.opencolleges.edu.au is at 719).

Further, let’s assess the cost structure of OCA:

Screenshot IQE 3

What stands out here is – OCA pays out a whopping 27% of its revenue in agent commissions!

This level of agent commissions is actually consistent with those paid out by the dodgier end of the VET space in Australia.  This is not to imply that OCA is a dodgy VET player, simply that they may have had to compete in the same space. Why would you pay out of your own pocket and sign up to www.onlinecoursesaustralia.edu.au when other providers are literally paying you to sign up to the same courses?

We also know that OCA relies on a lot of third party agents:

Third Party agents list for Conwal Institute.

So is OCA truly a sexy “online education business” (as touted by IQE), or is it predominantly a VET FEE-HELP driven business (just delivered via distance learning)?

All we know is that OCA grew phenomenally during the last 2 years (its valuation grew from c.$8m to c.$50m within a year) and it incurred a very high percentage of its revenue on agent commissions to get there. This is a similar story to other recently listed vocational education businesses.

My fear is that, with the impending VET FEE-HELP reforms and the OCA’s previous owners taking 100% cash and no scrip in Intueri, this may be another case of an impeccably timed vendor exit (i.e. the deferred acquisition consideration payable to the vendors is based on FY2015 EBITA).

In context of the vocational education sector turmoils of late, Forager put together a good article today on how one should be very wary of industries that suddenly erupt from a new government policy. In other words, high margins could mean that the business in question has a solid moat, or it could simply mean that the business has succeeded in working over its one and only customer (i.e. the government). In the latter case it rarely lasts.

Update (12/02/16): I decided to take a look at the Department of Training and Education statistics page on VET FEE-HELP given IQE itself has not yet release any data on OCA course completion rates. According to the statistics released by the government, during 2014, Conwal had:

  • 1,179 course enrolments funded via VET FEE-HELP
  • $7,814,774 of VET FEE-HELP loans had been drawn down to fund these enrolments
  • 54 EFTSL (Equivalent Full Time Study Learner) units had been completed by Conwal students
  • 16 Conwal students had successfully completed their course

Obviously, these numbers could have been skewed due to (1) Conwal’s phenomenal growth over 2014 (in 2013 they had only 66 VET FEE-HELP enrolments) and (2) the fact that the courses can last longer than 12 months. So we’ll need to wait for the release of the 2015 data to get a clearer and more definitive picture. But these would be the numbers I would be scrutinising to assess the probability of OCA emerging from the VET FEE-HELP reforms unscathed.

Update (23/09/16): So it took 7 months, but today Intueri went into trading halt due to this –

screenshot-2016-09-23-22-39-27

Update (27/09/16): Exactly as I had thought, “Online Courses Australia” comprises only 5% of the revenue for “Online Courses Australia Group”:

screenshot-2016-09-27-09-18-30

Note: The above blog post constitutes the author’s personal views only and is not to be construed as investment advice. Being obviously passionate about the art of investing, the author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this blog post.