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Enrolment trends a good sign for education group

20 Dec 2012 THE AGE - MATTHEW KIDMAN - MATTHEWJKIDMAN@GMAIL.COM


EDUCATION group Navitas has bounded 14 per cent higher over the past month following a positive update from the company on November 20. The company said student enrolments, particularly in Australia, had improved in the third semester, bucking a trend of recent times.

The stock had underperformed the overall market for two years and is still 20 per cent off its peak price of $6 in 2010.

Navitas earns its money by writing contracts with universities to supply supplementary education to fee-paying students.

The idea is for the students to transition from Navitas to the university proper in year two of their study.

Until 2010 Navitas was a high-growth business with overseas students flocking to Australia for a tertiary education. In the process the company spread its business offshore to the US and UK.

Most analysts currently have Navitas on a sell recommendation because the company trades on an eye-popping 22 times 2013 earnings.

The November update though was a major turning point with Australian enrolments, which still account for about 50 per cent of the business, improving.

The company also said forward enrolments for the first semester in 2013 looked positive.

The profit results for the current half will not inspire but if the Australian enrolment trends follow through for the big first semester analysts may find they are behind the curve and need to upgrade earnings for 2013 and 2014 by 5 per cent or more. This could see the stock jump over $5.

Vision Eye Institute

I HAVE written about ophthalmology group Vision several times this year in the belief that it looked cheap but needed to raise equity to pay down debt. The company recently announced a placement and a two-for-three non-renounceable rights issue to raise over $27 million. These funds will be used primarily to pay down debt.

The company recently forecast that it would earn EBITDA of $24 million to $25 million in 2013. If the company can hit these numbers it is currently trading on an EBITDA multiple of 5.5 times. This is on the cheap end of the scale for a medical business.

So do we buy the stock now? The heavy rights issue is open until the middle of January. Ideally, the stock would be weak into the end of this period as shareholders sell their existing shares to fund the rights at 34¢ . For the moment the buyers are out in force and the stock is trading at 49¢ a share. If between now and the end of the rights period the stock sinks into the low 40s it would create a perfect entry point. For existing shareholders they should not hesitate to take up the rights issue at 34¢ a share.

Capral

FOR the past three to four months we have talked a lot about a cyclical pick-up in housing stocks. One of the most leveraged players at the small end of the market is aluminium manufacturer Capral.

Hurting from a high dollar, a crippled housing market and cheap imports, Capral has seen its share price decline from a high of $30 a share in 1997 to just 12¢ recently. It will be a brave investor to take a punt on the company.

That said, the leverage to an upturn in the housing market may be pronounced and worth monitoring. Under the leadership of Phil Jobe the cost base of the company has been reduced dramatically over the past four years. The company said earlier in the week that before one-off costs it would produce an EBITDA of $2.5 million to $4 million for the year ending December 2012. This was an upgrade on the previous forecast and was derived from a lower cost base and a slight upturn in activity in the last quarter.

Capral has capacity to produce about 80,000 tonnes of product from its Queensland plant but is only producing at about 45,000 tonnes. Given the relatively fixed cost base of the business, if it managed to lift production to 55,000 tonnes it could easily make $15 million EBITDA in 2013. With a market capitalisation of about $60 million and net cash of about $12 million this would mean it could be trading on an EBITDA of just over three times. Much of this optimism depends on further interest rate cuts to boost housing starts and the Australian dollar staying at the current level or even falling. If the winds blow in the right direction, a share price move up to 40¢ would not be out of the question.

The Age does not take responsibility for stock tips.