At the 2018 Annual General Meeting, G8 Education Limited (ASX: GEM) highlighted the potential of the sector’s operation which has been otherwise impacted by the reduction in occupancy in 2017 that led the level of supply growth exceeding the demand growth by around 2.5%. The sector is expected to witness new centre supply growth rate between 3 and 3.5% in 2018, lower than 2017 growth levels, but still above current demand growth of approximately 2%. However, new Child Care Funding package is forecast to increase demand from July 2018.
On the other hand, the group implemented a centralized call centre for a pilot group of 17 centres in early April to improve the conversion of enquiries to bookings. This pilot will run for a 3-month period, prior to a more substantive roll-out during the second half of the year. The group is also aiming to profitably roll out new greenfield centres and acquire existing centres in areas that are accretive for the Group. The key focus is to optimize the performance of existing centre portfolio.
Up till now, the group opened 3 new centres and closed 3 underperforming centres this year, and a further 8 new centres have been planned for opening in the first half. The group expected to have earnings delivered from the greenfield and brownfield centres that were acquired during the last 2 years in line with its expectations. The Group also amended its dividend policy during the 2017 year that now entailed having a semi-annual 10 cents per share dividend in 2018 instead of fixed quarterly 6 cents per share dividend, before settling on a semi-annual dividend equating to 70 to 80% of Net Profits from 2019 onwards.
While the picture was already not very rosy with the occupancy level issues, GEM stated that the aim of previously maintained EPS target of 40 cents per share by 31 December 2019 is no longer achievable at the back of prevailing market environment and impact on occupancy. This update led the stock plunge by 7.23% on April 20, 2018 post a 43% fall seen in last six months (as at April 19, 2018).
The group however, expects the landscape to change from July 2018 in a favourable direction to help the group provide growth for shareholders. GEM will be providing a more specific 3-year EPS target at the time of its half-year results in August 2018. We maintain a “Hold” on the stock at the current price of $ 2.310.
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