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G8 Education Video



 

Stock Of the Day  - G8 Education  (BUY)

G8 Education (GEM) provided its full year results (12 months ended Dec ‘14) with a 70% surge in its net profit after tax to $52.7 million given the aggressive network expansion from 203 to 455 centres. This was broadly in line with expectation. The Company reported revenue increase of 79% to $491.3 million in comparison to the market expectation of $510 million. GEM is known to pay the dividends per quarter and has paid total dividends of 19 cents per share over the last year. GEM conveyed earlier about whipping the consensus on underlying earnings before interest and tax (EBIT) of $101 million by less than 5% and could achieve underlying EBIT increase of 101% to $101.5 million. However, the underlying EBIT was at the bottom of the guidance range of $101 million - $106 million. 21% improvement in EBIT margin from 18.4% in 2013 has been the highlight. This is owing to the factors including 85% of average occupancy across 455 centres and a 25% to 19% plummet in yearly staff turnover in a span of two years as at 2014. The Company spent a record $468 million on 203 new centres in 2014 but does not appear to slow down from further roll-up. It is to be noted that the result has been supported by acquisitions and solid organic growth (9% Like-for-like EBIT growth).


Group Centre Portfolio (Source – Company Reports)

GEM recently revealed about an added stream of earnings from the Company’s plan of buying another 12 childcare centres under a deal for $36 million including $6 million in earn-out payments. The purchase price is said to be four times the expected earnings before interest and tax for the 12 months post settlement, indicative of a significant achievement for the acquisition strategy with centres contributing to EBIT straightaway upon settlement. This will increase the total Australian portfolio reach to 34,270 places per day. The acquisitions are expected to settle before the end of June 2015, subject to certain conditions.



Underlying Margin Performance (Source – Company Reports)

A lot of talk is going on about the childcare funding refurbishment plan by the Productivity Commission. Primarily, the Productivity Commission has suggested to have a single subsidy called the Early Care and Learning Subsidy (ECLS) emanating from the coalition of three subsidies to families for child care costs, namely, the Child Care Rebate (CCR), Child Care Benefit (CCB) and Jobs, Education and Training Child Care Fee Assistance (JETCCFA). The ECLS would be characteristic of means tested with a subsidy rate from 85% for families with income less than $60,000 per annum to 20% for families with income greater than $250,000 per annum. The Commission has also recommended for setting a proposal for the benchmark at the median cost of a childcare place of about $75 for a 10-hour day for a child having an age over 36 months in long day care in the current year. GEM expressed that the recommendations appear to be good for the childcare sector. Specifically, the Company stated that the benchmark price seems to be in consensus with what GEM already charges. Accordingly, GEM conveyed that most of its clients would not be facing any brunt. It is further estimated that there will be a 3.1% growth in demand for child care services which will benefit the Company to some extent.

It has also been understood that the Company has the capability and capacity to fund 75 childcare centre acquisitions a year in support from available cash, cashflow generation and an underwritten dividend reinvestment plan.



Services (Source – Company Reports)

Short-term negative sentiments are appearing with regards to questions on GEM’s knack for consolidating the childcare industry as done earlier. However, GEM believes that its acquisitive nature may help the Company deliver well like the earlier times. The current weakness in share price looks to prevail in the interim, however, we reiterate that GEM’s potential is backed by strong EPS growth, condensed regulatory issues and efficient management. Although, the Company did not provide specific commentary for CY15 guidance, the overall stance appears to be positive.


GEM Daily Chart (Source - Thomson Reuters)

We thus put a BUY recommendation for this stock at the current price of $3.80.