G8 Education Limited

Redemption of Matured Notes: G8 Education Limited (ASX: GEM) is a childcare operator company with a market capitalisation of ~A$1.36 Bn (as at 3 June 2019). Recently, by release, the company announced that it had redeemed the Singapore notes amounting to S$270,000,000 on 18^th May 2019, which were listed on the Singapore exchange.  The company had repaid the notes using the $500Mn syndicated bank debt facility, which was announced on 22^nd October 2018.

Recently, the chairman stated that 2018 had witnessed a substantial change in the sector like introduction of new childcare subsidy in July and the group had faced various challenges by heightened supply in a large number of regions nearby Australia. The group made significant progress with respect to build a solid foundation throughout its people, asset and capital bases to ensure the sustained growth for the long?term, while continuing to grow as well as optimise the network of early education centres.Turning towards the network growth of the company, in 2018, the company had acquired 16 early education centres and sold 8 underperforming centres. As at December 2018, the company had a total number of centres to 502 in Australia and 17 in Singapore.

EBIT number was in accordance with the management guidance and stood at $136.3Mn, reflecting a decline of 12.7%. The cash flow generation had continued to be strong, which might attract the attention of the investors.GEM made improvement in the Group’s capital base by an execution of $500Mn syndicated bank debt financing during 2018. The company used this fund to refinance its $200Mn bank debt facility.

What to Expect From GEM: For bringing most of the Group’s leases onto the balance sheet, the company would implement the AASB 16, which is a new accounting standard for leases. The facility agreement sets out a clear process with respect to reporting and covenants following changes to Accounting Standards. The company anticipates the supply/demand environment would continue to be challenging in 2019.

Stock Recommendation: The company feels that it is well positioned to take benefits of any opportunity that might arise while maintaining high levels of quality and service to its families on the back of encouraging progress in which GEM had made with respect to the implementation of group strategy.

In the past one month, the stock has delivered a decent return of 3.26% and is trading slightly above the average of 52 week high and low prices of around $2.75 with reasonable PE multiple of 18.71x, and a dividend yield of 6.06%. Hence, we recommend a “Hold” rating on the stock at the current market price of A$2.860 per share (down 3.704% on 3 June 2019).  
 

Think Childcare Limited

A Quick Look at Q1FY19 Trading Update: Think Childcare Limited (ASX: TNK) is a small-cap Australian registered childcare company with the market capitalisation of ~A$114.9 Mn as of 3 June 2019. On 27^th May 2019, the company published its Q1FY19 trading update. It had witnessed overall improvement in operational metrics for average fees of 6% and days sold (40%) whereas wages as a percentage of revenue stood favourable by 1.6 percentage points in comparison to pcp. The revenue of the company reported an increase of 7% in Q1FY19 as compared to the prior year, which was primarily driven by higher average fess whilst days sold were in accordance with pcp.

There was an increase of 2.2 percentage point in service margin which was mainly supported by focused wage management. It had completed the national launch of Nido Education curriculum. Adding to that, Nido curriculum and philosophy transition is continuing in accordance with the company’s expectation.

Daily Average Fees (Source: Company Reports)

Future Strategies: The company’s strategy is to build a best in sector care offering by exceeding the quality level of national curriculum and the state-of-the-art environment. With respect to people, the company stated that the remuneration and rewards framework is in progress. With respect to finance and operations, the company added that fixed asset and capital investment program is in progress.

Stock Recommendation: Think Childcare Limited is anticipating to complete the acquisition of 4 services from its incubator partners in 1HFY19. The company had opened four purpose-built managed Nido Services. Additionally, the company had planned to open 2 greenfield services in June 2019.

When it comes to financial metrics performance, it had reported satisfying numbers. The gross margin of the company stood at 96.5% in FY18 in comparison to the industry median of 64.7%, which depicts that the company is addressing its operating expenses very efficiently. The return on equity stood at 15.5% in FY18, while comparing to the industry median of 14.0%. This represents that the company is providing better returns to its shareholder in comparison to the broader industry.

With respect to stock’s past performance, it had offered a decent return of 10.47% and 22.58% in the time span of one-month and six months, respectively. While in the span of three months, it had delivered a negative return of 1.60% and, thus, we can assume that the stock is quite volatile. Currently, the stock is trading close to its 52-week higher price of $1.950 with PE multiple of 18.16x and dividend yield of 3.42%. We presume that the positive developments are already factored in the current market price & hence we advise a wait & watch view on the stock at the current market price of $1.890 (down 0.526% on 3 June 2019).  

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