G8 Education Limited (ASX: GEM)

Significant Improvements and Acquisitions: G8 Education seems to be gaining attention ahead of its FY17 earnings update. The 7.3% dividend yield player was up over 3% on January 30, 2018 given the positive sentiments witnessed in the market. There were few changes made to the Board recently with Greg Bowell elected as the Marketing GM of the Company and Rod Anderson appointed as GM Property. G8’s acquisition and development pipeline has been performing broadly in line with the expectations, with the EBIT contribution relating to FY 16 and FY 17 acquisitions of $13 million and $3 million, respectively. The recent Oxanda acquisition has been successfully integrated and is expected to deliver targeted incremental earnings in FY 18. There was a change in the regulatory requirements in relation to staffing ratios during breaks in NSW, SA and Victoria which took effect from 1 October 2017 and the impact of such changes was indicated to be neutralised over the coming months as the internal casual labour pools will increase which will generate efficiencies. GEM forecasted an underlying EBIT of around $160 million for FY17, which is a 5% improvement on the prior corresponding period after adjusting for the movements in the Long Day Care Professional Development Program Funding. However, there was a dip in the FY17 occupancy growth to be around 77% from 79.7% for FY 16. There was some improvement in the team turnover and initial signs of recovery in Western Australia were also seen but were offset by market wide factors like there were some supply issues in areas such as Western Sydney, Gold Coast and a continuing sluggish wage growth was also seen. The new childcare package is expected to be positive for a significant portion of G8’s existing family base. Meanwhile, the stock price decreased by 27.3% in the past three months. We give a “Hold” at the current price of $3.38, while the earnings update is due in next few weeks.
 

Strategic Framework (Source: Company Reports)
 

Automotive Holdings Group Limited (ASX: AHG)

Operations’ Expansion: Automotive Holdings has a fully franked 5.2% dividend yield and the group recently agreed to acquire two franchised automotive dealerships in the southern Auckland suburb of Manukau to expand its New Zealand operations. Whereas co-located Hyundai and Mitsubishi dealerships are close to AHG’s existing Holden and Nissan dealerships in Manukau and will soon become part of the Group’s broader New Zealand operations. Two volume brands were introduced in its New Zealand portfolio due to the acquisition and got aligned with its automotive growth strategy to acquire and aggregate dealerships in and around existing AHG dealerships. These were well-run businesses and brands which rolled into an existing AHG hub with a number of initiatives that will help in driving both incremental revenue and cost synergies across both dealerships. The total consideration involved in the acquisition has been indicated to NZ$7.5 million for goodwill, plus stock and assets but is subject to valuation and some customary conditions like manufacturer approvals. This is expected to settle late next month. AHG has also planned to hold nine automotive franchises in Auckland. Meanwhile, group’s latest results indicated that returns to shareholders reflect company’s healthy position and were in line with the dividend policy of paying 65 to 75% of operating profit. While some hiccups might be expected in the earnings update, we recommend a “Hold” on the stock at the current price of $3.59
 

FY 17 Results Summary (Source: Company Reports)

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