Education is one of Australia's largest industries, ranking in the top 10 for "gross value added" in the national accounts, and appears to be one in which we have a competitive advantage. Global demand for education is continuing to grow as the developing world chases the developed world. And demand is likely to remain strong even when economic conditions waiver, as reduced employment prospects or more competitive labour markets can drive interest in reskilling or upskilling.
Yet this is an industry that is significantly under-represented on the domestic sharemarket.
Navitas has acted as the industry beacon, rising from humble beginnings in Western Australia to operating on the global stage with a market capitalisation of $1.5 billion. That valuation positions it among the top 10 companies globally that are primarily in the education services sector, although there are also largish listed companies such as The Washington Post, which has acquired a number of businesses in Australia that include education among a broader portfolio.
A second listed entity, RedHill Education, tried to bolt together a number of educational businesses in the hope it could replicate the success of Navitas. But it languishes with a market capitalisation of $3.9 million, not far from the $3.2 million it held at June 30, after a disastrous listing in which it fell short of its prospectus revenue forecast for fiscal 2011 by a third and reported operating losses that have only just been stemmed in the September quarter.
RedHill appointed Glenn Elith as CEO in May, with a brief to salvage the business. Elith is a chartered accountant experienced in business turnarounds, including stints with Lion Nathan and George Weston Foods. He was CFO at organic retailer Macro Wholefoods Markets, which was sold to Woolworths in 2009. RedHill recently announced that under Elith it had achieved an EBITDA-positive and cash-flow result in the September quarter.
RedHill operates three Sydney-based colleges: the Academy of Information Technology, Greenwich College and the International School of Colour and Design. It also owns an independent student agency, Go Study Australia. But with the business historically generating about $14 million revenue (the original prospectus forecast $21.4 million in fiscal 2011), the second step for Elith is going to be to find a way to drive shareholder value through consolidation.
While universities dominate the higher education category (and even then there are 135 businesses competing), the broader educational industry is highly fragmented. There are 4910 registered training organisations (RTOs), according to training.gov.au. In addition, analyst IBIS World estimates there are more than 11,600 businesses offering language and other educational services (from business colleges to driving schools).
There is a third listed player that has kept a low profile and progressively acted on the consolidation theme, including the purchase of a 10 per cent stake in RedHill.
Academies Australasia Group is a tertiary education business that evolved out of a listed entity with more than 100 years of history. It operates nine colleges in Australia and one in Singapore, offering vocational, English and higher education. Its market capitalisation is $38 million and it is tightly held.
Last month it bought 40 per cent of the College of Sports and Fitness for $300,000 cash and shares, as well as 100 per cent of Melbourne-based language college Discover English for $190,000. It bought 51 per cent of Benchmark College for $5.5 million and paid $1.1 million for 75 per cent of Melbourne-based Academies Australasia Polytechnic, which offers tourism and hospitality qualifications, English courses and delivery of University of Ballarat programs, including MBAs.
Market conditions look ripe for continued consolidation, with weaker competitors placed under considerable pressure. The international market is still recovering from a post-2009 plunge that followed negative publicity regarding student safety in Australia, changes to Australia's migration policies and shifts in exchange rates.
Industry feedback regarding domestic students is that tight purse strings in government are resulting in a shakeout within the sector. And a move among some states to contestability between private operators and TAFEs offers new opportunities for those operators with scale and efficiency.
Martin Pretty is head of research at Investorfirst Securities.