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VET-ing the IPO market

Seeking an independent view on IPOs, and stocks in general, is arguably a sensible path to take, in addition to your own analytical skills – a bit of time, a good degree of common sense and a calculator.

The massacre of Vocation (VET) this week was a timely reminder that not all IPO’s are worth the paper the Prospectus was printed on.

Listed in December last year at $1.89 per share giving it a market capitalisation of approximately $430 million, VET looked the goods in the booming tertiary education sector. Rising numbers of students, backed by government subsidies for each placement and a variety of industry courses to spread the risk appeared to be a recipe for success for VET.

Several large and reputable institutional investors took sufficient stock to become substantial shareholders. The IPO was backed by in-depth research by UBS and other large investment banks that unanimously recommended the shares as a ‘buy’ with some lofty price targets.

The February interim result and August final result didn’t signal anything of the impending disaster that was to befall the company throughout September.

In fact, VET raised $74 million more equity at $3.05 per share while the review of its subsidiaries was underway! Assuming that was disclosed to investors as a material item, it beggars the question; why weren’t the red flashing lights going off everywhere from the brokers and fund managers?

The short version of the story is that the Victorian government reviewed some questionable practices and subsequently removed a significant amount of funding for VET’s ‘solutions’ business.

The result was laid bare this week when VET’s share price didn’t just plunge, it surrendered.

The market wiped $300 million off the capitalisation of the business, far in excess of the value of the earnings foregone through the loss of the government funding.

The harsh treatment of the share price reflects the reputational damage done to VET and the question now becomes ‘how does VET recover from this’ or indeed whether it can at all.

Regardless of the prognostications for VET, it raises some more general questions and issues about how investors should approach new company listings, such as Medibank Private.

We plugged the Medibank float recently but have squirmed at the government advertising campaign that spouts the company’s doubling of its revenue over the last ten years. That’s not hard to do when the revenue increases are determined by a government agency (PHIAC).

2014 will be remembered for the very large number of listings that have taken advantage of the liquidity in the market and the relatively good prevailing economic conditions in Australia.

Most have been fairly orderly affairs and have delivered investors some quite good outcomes. Many have been selldowns from private equity owners looking for the exit door while others have played a theme of a new industry, such as the education sector and the aged care industry.

Large (Healthscope, Medibank Private, Asaleo Care, Spotless Group, Nine Entertainment among others) and not so large (Dick Smith, Vocation, Burson, Beacon Lighting etc) have attracted varying amounts of attention and have consumed a lot of time for investors prepared to wade through the Prospectuses and pre-marketing research (if you were lucky enough to get it).

Like all investment opportunities, however, we are naturally attracted to the positive stuff and averted from the negative stuff. It’s like eating your roast pork and leaving the Brussel sprouts til last or hiding them under your mashed potato, or feeding them to the dog under the table… everyone does it.

We all know that eating your greens is good for you. And so it is with risk statements spelled out in a Prospectus.

But it is the broker research that deserves as much scrutiny as the Prospectus. Spare a thought (or not) for the UBS analyst who covered VET from the outset when UBS floated the company. The analyst has persistently recommended the stock as a buy and even after this week’s news, maintains the buy rating.

The sceptical reader might think the UBS analyst has little choice but to support the stock with such a recommendation, and you’d probably be right. Does this mean that his analysis is untrustworthy? Not necessarily, but a discerning reader would do well to apply a healthy discount to the recommendation.

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