Company Overview - G8 Education Ltd. is an Australia-based company. The Company is a provider of developmental and educational child care services. The Company is engaged in the operation of child care centers owned by the group; contract management of childcare centers, and ownership of childcare centre franchises. As of December 31, 2011, the Company operated/managed 134 child care centers. The Company’s subsidiaries include Grasshoppers Early Learning Centre Pty Ltd, Ramsay Bourne Licences Pty Limited and G8 KP Pty Ltd, among others. In June 2013, the Company acquired Dolphin Early Learning Centres, an Austral-based provider of childcare and education services. In July 2013, the Company acquired Mary Poppins, Peppercorn & Smart Care Childcare and Education Centres. In December 2013, G8 Education Ltd, acquired 29 undisclosed premium childcare & education centres. In April 2014, the Company completed the acquisition of a number of companies which formed part of the Sterling Early Education group.
Analysis - G8 Education Limited (GEM) aims to be Australasia’s leading provider of high quality, developmental and educational child care services, as unveiled during the recent investor presentation of November 2014. It has a market capitalization of $1.6 billion. The total portfolio entails 440 owned childcare and education centres in Australia and Singapore, and an additional 37 under contract in Australia.
Financial Performance (Source – Company Reports)
GEM has adopted an acquisition strategy that entails buying of profitable centres which are in operation, and integrating a number of operational metrices and performance indicators to improve individual centre performance while improving the overall group performance.
Education Childcare and Education Centre Portfolio (Source – Company Reports)
During the second quarter of 2014, GEM’s sales totaled A$187.25 million, which is an increase of 59.4% from the A$117.45 million in sales witnessed during the second quarter of 2013. The stock of the Company was up 48.1% to A$4.77 for the 52 weeks ending 14 November 2014. In general, the Company is paying out dividends that are higher than the earnings. During the second quarter of 2014, the Company reported earnings per share of A$0.05. This is an increase of 23% versus the second quarter of 2013 wherein the Company reported earnings of A$0.04 per share.
Brands – Australia (Source – Company Reports)
In Australia, the Company has a portfolio of 422 childcare and education centres and an additional 37 contracted but yet to be settled. GEM has about 6.5% market share. 11,420 childcare centres run by 7850 operators generate A$7.8 billion per annum.
Locations – Singapore (Source – Company Reports)
In Singapore, GEM owns 18 childcare and education centres, and operates 37 franchised childcare and education centres.
The model that covers the Singapore franchise centres’ is a fee for service model.
Brands – Singapore (Source – Company Reports)
In October 2014, GEM announced the acquisition of 20 childcare and education centres, and successful placement of 20.4 million shares at A$4.91 raising A$100 million. The acquisitions are to be funded by a $100m equity placement at $4.91 and will result in a 4.2% increase in licensed capacity to 33,267. The acquisitions have been expected to settle before the end of February 2015. For 17 out of 20 centres, GEM’s management estimates the $25.7m price paid (excluding regional management and head-office costs) while remaining three centres which were associated with the Sterling acquisition in March. Once the settlement is complete, GEM will have 459 child-care centres in Australia.
In the November settlement update, the Company stated that GEM settled 19 childcare and education centres, adding 1,301 places in Australia during October 2014. Further, the acquisitions have been funded from existing cash reserves. With 422 childcare and education centres in Australia by now, GEM has a daily license capacity of 30,102 children. The Company’s ownership in Singapore remains unchanged at 18 childcare centres.
Total Assets and Debt (Source – Company Reports)
The Company announced the payment of 5 cents per share fully franked dividend for the quarter ending 30 September 2014. This would be subject to the Dividend Reinvestment Plan under which shares would be issued at a 5% discount to the daily volume weighted average market price for all GEM shares sold on the ASX during the 10 trading day period starting 5 trading days preceding and inclusive of the record date and ending after the 4 trading days immediately following the record date.
Multi-brand portfolio strategy, revenue driven by supportive government policies, strong long-term demand for early childhood education services, acquisition opportunities driven by highly fragmented industry, and portfolio of high quality established childcare centres are key competitive strengths for GEM.
As part of its business strategies, the Company has spent A$9.4 million on improving childcare facilities in respective centres in 2013. The Company has raised $340 million in debt through issue of bonds.
Few risks to be wary about entail competition for assets in view of GEM’s acquisition model, acquisition risks
per se in view of integration of assets, unemployment rate, changes to government subsidies to parents, and changes in government regulation.
Irrespective of the fact that the Company paid multiple times (about four times) of its earnings before interest and tax for acquisition, GEM did not witness any shortage of sellers. This has been owing to its position as a well-capitalized buyer. We also note that extremely fragmented market offers GEM the opportunities to support expansion through acquisition. In addition, key revenue drivers for GEM’s growth include growth of licensed places and occupancy rates. As regulatory requirements govern the licensed places, material growth looks to be a pure play driven by acquisitions. GEM has reported a good track record of optimizing floor space configurations decreasing the gap between licensed places and configured places. Furthermore, GEM’s management has delivered operating efficiencies which appears to be a predominant driver for the Company’s success with a strong record of increasing occupancy rates and limiting costs.
Childcare and Education Centre Occupancy (Source – Company Reports)
Specifically, the GEM’s management is able to drive higher occupancy rates based on the ability to spread marketing and refurbishment dollars across a growing portfolio of centres. The Company could reduce employee expenses as a percentage of revenues by 1.7% per year since fiscal 2009 as acquired centres are often poorly managed with excess staffing, owing to efficient roster management at GEM. This also resulted in having a lower employee turnover, which at 11.6% is well below the industry average. The Company could also reap benefits through procurement. With the growth in the business, the purchasing power increases which in a way facilitates purchase of cheaper consumables including food, toys, books and sanitation products. Moreover, centralization of administration, including back-office functions such as legal, insurance, IT, accounting, payroll and property management, have added to GEM’s growth.
In view of the fact that child care is a defensive industry with growing demand while there are increases in fee and positive demographic factors are key drivers. The population of children in Australia is also expected to increase until 2016 as baby boomers become grandparents (based on the Australian Bureau of Statistics). The heavily fragmented child care industry is expected to thus experience further consolidation. Moreover, the industry revenues are set to grow progressively over the medium term with immense support from key factors. These include increasing female workforce participation, growing awareness and belief in developmental benefits, increase in child population and increasing affordability through increased government funding.
G8 Daily Chart (Source - Thomson Reuters)
Overall, we do see that GEM has a strong business growth and is run by efficient management. In view of the fact that the Company is well-positioned to make the most of the eye-catching medium-term industry fundamentals, we put a
BUY recommendation for this stock at the current price of $4.13.
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