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G8 Education Video



 

Stock Of The Day - G8 Education (BUY)

G8 Education, our pick for today, announced for the payment of 6 cents per share fully franked dividend for the quarter ending 31 March 2015. GEM also updated that the Dividend Reinvestment Plan will be applicable to this dividend. Further, the Company conveyed that 5% discount will be applicable for shares issued under the plan wherein the discount would be with respect to the daily volume weighted average market price for GEM shares sold on ASX during 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.



Number of Centres Acquired per Year (Source – Company Reports)

There has been a delay in settlement of 8 of the 25 childcare centres which were announced for acquisition from different vendors in August 2014. This delay has come as a result of regulatory and licensing issues outside the control of GEM and respective vendors. The Company also updated that settlement of 17 centres has been complete and the settlement for the remaining centres is expected by November 2015. Of course, this delay is going to hit the $10 million figure which was expected to be the EBIT associated with the 8 centres in 12 months post settlement. After adjusting for the time delay, FY15 EBIT is expected to be reduced by about $10 million, however, settlement in FY15 will still ensure full year contribution in FY16. It has been noted that GEM needs to have its vendors mend the inconsistency with regards to the discrepancy between Federal and Local Government Licensing for centres in terms of varied regulations on licensed place numbers.
 
The aforementioned delay alongside little submissive acquisition run-rate as of now does seem to affect the performance to some extent. However, GEM still has the potential to endure double-digit earnings growth over medium-term backed by the operating cash flows and the DRP. GEM has indicated about a strong pipeline of acquisitions at 4x EBIT. However, capital raisings may be needed to support the current dividend payout ratio. Nonetheless, the overall scenario is expected to drive share price appreciation once the aforesaid aspects fall in place. Rise in the rate of acquisitions will be helpful with regards to the 75 centre acquisitions expected per annum from Calendar year 2015 to 2017. Even with the slight short-term negative market sentiments, the boned up consensus forecasts inferring 50 centre acquisitions a year can prove to be adequate. The prime catalyst for growth thus appears to be the centre acquisitions which are expected to stay in favor of GEM in the long run. Awaiting response from the government with regards to the productivity commission proposal for better government funding for the industry can also weigh towards a positive side.



Key Financial Ratios (Source – Company Reports)

It is needless to say that the Company has so far operated well within its financial covenants. Its conservative capital management plans have been reflected by gross debt to EBITDA and interest coverage.



Like for Like Revenue and EBIT (Source – Company Reports)

We also note the quite recent change in the interests of substantial holders that gives a good indication of GEM’s future potential and trust bestowed by the shareholders. 


Shareholder Interests as at Feb’ 15 (Source – Company Reports)

Performance with regards to the rise in sales during each of the previous five years with sales increase a total of 1,351% since 2009 has been quite interesting. The Company revealed a net profit of $53 million for 2014 indicating 70% gain on the prior year. These financial results reflect an encouraging future in terms of GEM’s internal efforts for sustaining growth.


G8 Daily Chart (Source - Thomson Reuters)

Accordingly, we reiterate a BUY recommendation for this stock at the current price of $3.22.