great buying opportunity, page-3

From UBS institutional report (but need to remember that UBS was involved in the float, so potentially more biased)

Victorian review settled Vocation has announced a settlement with the Victorian Department of Education in relation to its review of some of Vocation's Victorian operations, BAWM and Aspin. The investigation found: there had been an over reliance on third parties to identify and refer students; and some students experienced lower quality training than intended. The settlement will see Vocation surrender $19.6m in Government funding, and no longer use third party training and assessment providers in Victoria. FY15 EBITDA guidance of $53-57m provided For FY15 Vocation has provided explicit EBITDA guidance of $53-57m. Guidance reflects: The surrender of $19.6m in Government funding, which is expected to have a $5m impact on earnings in FY15; Lower than budgeted enrolments due to the review and restructure; Somewhat offsetting this is DEECD's approval of one of Vocations' other RTO's for a Domain C contract for the Building Brighter Futures program. Incorporating these developments into our forecasts, results in our FY15 EBITDA estimate reduced by 23%, while our FY16-17 estimates decline 21-22%. Maintain Buy – Victoria resolved, focus on ongoing operations The details provided in relation to the DEECD review highlights the risks associated with Government funding contracts. However, with the review resolved conclusively, restructuring actions taken to reduce similar risks in the future and the financial impact quantified, we believe the market should focus its attention on the ongoing operations, which continue to generate meaningful earnings. Valuation: Price Target reduced to $2.70 On the back of our revised estimates, we have reduced our price target from $4.45 to $2.70. Our new price target is the blended average of our reduced DCF valuation of $3.15 ($4.45 previously) and a P/E derived valuation of $2.25, which is based on a small ords index FY15 P/E of 15x.


Investment case The ~$9bn VET sector is currently witnessing structural change as a result of changes in government policy and regulations. In our opinion, significant commercial opportunities exist for those providers who have positioned themselves for these changes – such as Vocation. The company features a national footprint, multidisciplinary qualification offering, customised and unique content, a diverse client base, funding access, and systems & processes for regulatory compliance. Upside scenario The upside scenario for Vocation entails no additional impact from the review by the Victorian Department of Education beyond the financial impact announced in October 2014, with ongoing earnings augmented by further acquisitions. This would increase our valuation by 17% to $3.16 from $2.70. Downside scenario The downside scenario for Vocation entails further review of Vocation's operations by Victoria and other State Governments. Negative findings from these potential reviews could result in loss of future earnings. This could reduce our valuation to $2.16 from $2.70. Upcoming catalysts Upcoming catalysts include the Victorian State Government Election and the introduction of a demand driven funding model by the NSW State Government in CY15.


Business description Formed via the merger of three founding companies, CSIA, BAWM and Avana, Vocation is one of Australia's largest education providers. Focused on the Vocational Education and Training (VET) sector, Vocation had over 24k new course enrolments across 78 different qualifications in FY13. It provides services across all aspects of the VET supply chain, including: student recruitment; student training; and student management. Industry outlook Industry outlook is positive with all States introducing demand driven funding models by CY15. This provides significant growth opportunities for private registered training organisations to garner market share. Revenues by region (%) Vocation generates 100% of revenues in Australia. EBIT by product segment Vocation generates 100% of EBIT from the provision of Educational Services.


Victorian review resolved conclusively Vocation has announced that it has reached a commercial settlement with the Victorian Department of Education and Early Childhood Development (DEECD) in relation to the Department's review of some of Vocation's Victorian operations. As a result of the settlement, Vocation will surrender ~$20m in Government funding and will no longer use third party training and assessment providers in Victoria. As a result FY15 EBITDA is expected to be in the range of $53-57m and our price target has been reduced to $2.70. The details provided in relation to the DEECD review highlights the risks associated with Government funding contracts. We therefore expect the share price to trade materially lower in the short term as the market reassesses this risk in light of the review. However, with the review resolved conclusively, restructuring actions taken to reduce similar risks in the future and the financial impact quantified, we believe the market should focus its attention on the ongoing operations, which continue to generate meaningful earnings. Commercial Settlement Vocation has announced a settlement with the Victorian Department of Education and Early Childhood Development (DEECD) in relation to its review of some of Vocation's Victorian operations, BAWM and Aspin. The investigation found: there had been an over reliance on third parties to identify and refer students; and some students experienced lower quality training than intended. The settlement will see Vocation surrender $19.6m in Government funding, and no longer use third party training and assessment providers in Victoria. Review findings The DEECD reviewed three qualifications: Certificate III in Warehousing Operations; Certificate III in Competitive Systems & Practices; and Certificate II in General Education for Adults. The review found:  There had been an over reliance on third parties to identify and refer students for enrolments, which resulted in some students being enrolled in inappropriate courses for their needs; and  There were inadequate controls in place to manage the performance of third parties delivering training and assessment, resulting in some students experiencing a lower quality training experience than intended for their job seeking needs. Settlement As a result of the review Vocation and the DEECD have agreed to a settlement, which includes:  $19.6m of Government funding relating to the three courses surrendered;  $9m of funding that withheld while the review was in progress paid to Vocation;  BAWM and Aspin will relinquish their funding contracts in early CY15 as currently enrolled students complete their training; and


Restructure Vocation has also announced that it will restructure its Victorian operations, with the primary change being to no longer use third party training and assessment providers. Additionally, Vocation will overhaul its senior management team in Victoria, with Ross Robinson taking over as CEO of Vocational Education and Training. FY15 guidance $53-57m For FY15 Vocation has provided explicit EBITDA guidance of $53-57m. This compares to UBSe of $71.3m. Guidance reflects: The surrender of $19.6m in Government funding, which is expected to have a $5m impact on earnings in FY15; Lower than budgeted enrolments due to the review and restructure, which will see Vocation eliminate the use of third party training and assessment providers in Victoria; Somewhat offsetting this is DEECD's approval of one of Vocations' other RTO's for a Domain C contract for the Building Brighter Futures program. Incorporating these developments into our forecasts, results in meaningful change in our FY15-17 estimates. Our FY15 EBITDA estimate is reduced by 23%, while our FY16-17 estimates decline 21-22%. At an EPS level, our revised estimates also incorporate the impact of the share placement in September


Valuation On the back of our revised estimates, we have reduced our price target to $2.70. Our new price target is the blended average of our reduced DCF valuation of $3.15 ($4.45 previously) and a P/E derived valuation of $2.25, which is based on a small ords index FY15 P/E of 15x. The reduction in our DCF derived valuation to $3.15 from $4.45 incorporates both the reduced earnings from the Victorian review and restructure, the share placement and an increase in our WACC to 12.5% from 12.0% as we have lifted our equity risk premium to 7.0% from 6.5%.