G8 Education Ltd

GEM Details

G8 Education Ltd (ASX: GEM) is Australia’s  largest private provider of early childhood education and care  with over 470 early learning centers. As of 16^th August 2021, the market capitalisation of the company stood at ~A$860.10 million.

FY20 Results Performance (For the Period Ended 31 December 2020)

Revenue Decreased 14.5%: During FY20, the company has recorded a 14.4% YoY decline in total revenue to $788.1 million which reflects a blend of Covid-19 impacts and government subsidies partially offsetting the same.  

Decline in Profitability: Underlying EBIT reduced by 11.9% on the prior year to $105.2 million. It was impacted by the pandemic’s effect on attendance levels and the temporary changes to the child care sector’s funding model, and includes a $12 million cost towards the employee payment remediation program. Further, the company has reported a statutory loss after tax of $187 million primarily impacted by a non-cash impairment expense of $237 million (post-tax). On an underlying basis, NPAT came at $60 million, a decrease of 11.3% on the previous year.

Consolidated Income Statement (Source: Company Reports)

Update on Greenfield Strategy

Strategy Aimed at Driving Growth: In its Greenfield Strategy & Reporting Presentation released on 16 June 2021, the company highlighted that 70% of the past greenfield cohort have, or are expected to, produce an ROI of over 20% on reaching maturity. Further, the legacy greenfield program has outlined a refreshed greenfield approach that intends to gradually boost the network and achieve measured profitable growth.

A 'Capital-Lite’ Model Boosts the Prospects of Producing Higher Returns: The company highlighted that the additional new greenfield centres will be opened annually in attractive and targeted locations in a deliberate manner. This will be done through partnerships with quality developers in a 'capital-lite’ method.

Key Risks

The group’s business is exposed to  risks of macro-economic impacts as well as Covid-19 related uncertainties and changes in customer demand that would impact the attendance and occupancy at its centres. The company operates in a competitive environment with the consistent evolution of new supply entering the markets that may impact business performance. Further, it functions in a complex regulatory environment. Any regulatory changes to the early learning sector would adversely affect its business and financial performance. 

Outlook

Strong Balance Sheet: Driven by benefits of equity raising worth $301 million along with prudent capital management has enabled the company to end the year 2020 with a strong balance sheet and a net cash position of $21.8 million. Further, the completion of its refinancing activities in February 2021 will aid in delivering lower interest costs, higher flexibility, and increased tenor. Capital raising also helps the company withstand a prolonged economic downturn while allowing it to pursue opportunities that may emerge. The company believes it is well-positioned to capitalise on sensible growth opportunities. Meanwhile, GEM has plans to open around 10 new greenfield centres in CY21 with a capital outlay of approximately $4 million.

Meanwhile, the company will release its CY21 half-year results on 23 August 2021.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). A discount has been applied to EV/Sales Multiple (NTM) (Peer Average) considering its weak performance in FY20, and the risks associated with COVID-19.

For the purpose of relative valuation, few peers like Mayfield Childcare Ltd (MFD.AX), Cluey Ltd (CLU.AX), among others have been considered.

Considering its strong balance sheet, disciplined capital management, refreshed greenfield strategy and strong liquidity position,  we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.025 per share, up by 0.985% on 16^th August 2021.

Helloworld Travel Limited

HLO Details

Helloworld Travel Limited (ASX: HLO) is a travel distribution company in Australia, offering international and domestic travel products and services to customers around the world. Their services include retail travel networks, destination management, corporate travel management, wholesale travel, air ticket consolidation, and online operations.

Result Performance (Half-Year Ended 31 December 2020 – H1FY21)

• Fall in Revenue: Revenue stood at $29.6 million, down 85.2% YoY led by the impacts of COVID-19, mainly closed international borders and a regularly changing domestic border environment.
• Net loss before tax stood at $21.5 million, a fall of $54.4 million on H1FY20 profit of $32.9 million, and after-tax loss stood at $15.1 million.

Key Data (Source: Company Reports)

Q3FY21 Update (For the Quarter Ended 31^st March 2021)

The TTV results stood at ~$261.5 million, down 79.6% YoY. Meanwhile, the company recorded the highest TTV of ~$112.5 million in March 2021 month.

• Revenue for the period decreased to ~$15.0 million, down 75.8% YoY. 
• Underlying EBITDA loss for Q3FY21 increased to ~$4.4 million versus a loss of ~$2.7 million in Q2FY21.
• At the end of Q3FY21, the company had a cash balance of $125.9 million. It had external borrowings of $81.0 million with available headroom on its debt facilities of $30.2 million.

Key Data (Source: Company Reports)

Outlook:

The company anticipates positive momentum in TTV levels, driven by the open state borders across Australia and the commencement of quarantine free trans-Tasman travel. The company is anticipating to achieve annualised TTV of ~$1 billion for the FY 2021 as well as to incur the full-year underlying EBITDA loss of ~$14.0 Mn- $16.0 Mn for FY 2021.

After the opening of Australia state borders, trans-Tasman bubble, and other limited international bubbles reopening in the second half of 2021, the company seeks underlying EBITDA loss of ~$1.0 million to ~$3.0 million in Q1FY22 and positive underlying EBITDA in Q2FY22.

Key Risks:

The company is expected to be impacted by the risk of lockdowns and closed borders due to any forthcoming wave of COVID-19. Furthermore, intense competition in the tourism industry may drain significant market opportunities.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

The company’s current ratio for H1FY21 stood at 1.26x, better than the industry median of 0.97x, implying that the company possesses better capabilities to meet its short-term obligations than its peer group.

The stock fell by ~10.4% in 3 months. It has made a 52-week low and high of $1.545 and $3.360, respectively.

An EV/Sales based relative valuation (on an illustrative basis) has been applied and the target price reflects a rise of low double-digit (in % terms). A discount has been applied to EV/Sales Multiple (NTM) (Peer Average) considering its weak performance in Q3FY21, and the risks associated with COVID-19.

Considering the aforesaid facts, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.550 per share, down by 0.959% on 16^th August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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