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GEM VIDEO



 

Stock Of The Day - G8 Education(BUY)

G8 Education Ltd (ASX: GEM) recently advised about the expected rise in overall costs by about 2.8% to 3.2% based on any changes introduced in January 2016 in view of the National Quality framework changes to improve education and care across the sector. Policy changes by the company are expected to be announced post the release of appropriate packages by the federal government. On a positive note, GEM has added about seven new subsidiaries as guarantors to the SGD$500 million multicurrency debt issuance programme. With expansion of portfolio, new subsidiaries are expected to be added in near future. Similarly, few subsidiaries as guarantors have been added to the Australian unsecured corporate note arrangements. Further, the news to have increased childcare subsidisation by the government to each family and relaxation/ removal of subsidisation caps may help better affordability and may also enable GEM to raise the prices.


2014 Group Revenue and EBIT (Source: Company Reports)

Just to refresh your memory, the company announced the payment of a fully franked dividend of 6 cents per share for the quarter ended 31 March 2015. For the full year FY14, the company reported revenue growth of 79% to $491.3 million and EBIT up 117% to $107.2 million. Net profit after tax amounted to $52.7 million, an increase of 70% over the previous year and basic EPS grew by 43% to 16.15 cents per share. Underlying earnings before interest and tax were $101.5 million (101% up over the previous year), underlying net profit after tax came to $60.6 million (up 88% over the previous year) and underlying EPS amounted to 18.57 cents per share (up 58% over the previous year).


Wages as a percentage of revenues continued to show a favourable trend improving to 56% in the year against 58% in the previous year. Rent expenses as a percentage of revenue dropped to 11.6% compared to 12.1% in the previous year. As a result of the improved performance, underlying EBIT margins grew for the fourth consecutive year to touch 21%.

As at 31 December 2014, trade and other receivables showed an increase from $9.6 million in the previous year to $14.2 million because of the timing of year end cut off and the consequent effect on debtors. Other current assets rose from $4.4 million to $13.6 million because of increased deposits on acquisitions. Goodwill jumped from $482.3 million to $809.2 million because of the purchase price of child centres acquired. Trade and other payables increased by $35.7 million largely because of the dividend payable.


Change in Portfolio (Source: Company Reports)

Operating cash flow remains robust at $74.7 million for the year 2014 and cash conversion continues to be satisfactory. The payment of $448 million for businesses are for the acquisitions and settlements during the year. Cash flow from financing activities shows an increase of $394.5 million because of the proceeds from share placements and corporate notes adjusted for the repayment of $46.6 million by way of senior secured debt from Bank West.


The company owns and operates 455 centres (437 in Australia and 18 in Singapore) with a total of 32,872 licensed places and announced that 2014 was a year of significant progress and that 203 centres with 13,697 licensed places had been acquired and integrated during the year. The focus will continue to remain consolidation with discipline in areas with high demand. The company has also now announced that it has concluded contracts to acquire a further 12 premium child care and education centres from a number of different sellers. The total purchase price is $36 million of which $29.6 million is payable on settlement and the balance will be paid if the EBIT target is achieved in the 12 months post settlement. The purchase price works out to 4 times the EBIT for the 12 months post settlement and this price is considered acceptable especially since these centres will start contributing immediately post settlement.

The average occupancy like-for-like for the entire portfolio continues to show growth both on a per year basis as well as a total basis. The rate touched a high of 90.6% in November 2014. Significant growth opportunities for organic growth will materialise in 2015/2016 from the acquisitions made in 2013/2014.


LFL Occupancy and Centres Acquired (Source: Company Reports)

Some investors may argue that the company's strategy is a kind of arbitrage in which it acquires child-care centres for a low earnings multiple which it combines into itself for which the market values it is at a much higher multiple. Investors also recall the few cases where the strategy was poorly executed and mistakes were made. However, this company has clearly demonstrated that the aggregation strategy definitely has its advantages. In addition to the head office cost synergies which have declined from $1193 per place in 2009 to $455 in 2014, it is able to implement operational improvements which are underlined by the striking improvement in profits as well as the ongoing reduction in staff turnover. EPS has increased in each of the past seven years. The Australian child care market is extremely fragmented and the company estimates that there are currently 9208 child-care centres available for its acquisition strategy to which it can bring its high-quality management and operational skills to add value.


GEM Daily Chart (Source - Thomson Reuters)

The share price has dropped substantially from its high of 2014 and the stock is trading at a PE ratio of about 25 with a dividend yield of 5%, which in a way represents a buying opportunity.

Accordingly, we put a BUY recommendation for the stock at the current price of $4.12.