G8 Education Ltd

GEM Details

FY20 Results Performance: G8 Education Ltd (ASX: GEM) is the largest provider of early childhood education and care in Australia with 472 total centers. As of 6 May 2021, the market capitalisation of the company stood at ~A$843.15 million.

During FY20, the company has recorded a 14.5% YoY decline in total revenue to $788.4 million which reflects a blend of Covid-19 impacts including various government support packages. Underlying EBIT reduced by 11.9% on the prior year to $105.2 million due to a $12 million cost towards 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).

The company has kept dividends suspended for the time being, and the same will be reviewed in August 2021.

Consolidated Income Statement (Source: Company Reports)

Outlook: The company witnessed stronger than expected occupancy in 2020 after having recovered from the initial impact of COVID-19 related lows in April and the positive trend remaining in 2021. Equity raising of worth $301 million along with prudent capital management has enabled the company to end the year 2020 with a strong balance sheet with a net cash position of $21.8 million. The completion of the refinancing activities in February 2021 will result in delivering lower interest costs, higher flexibility, and increased tenor. Besides, GEM has plans to open around 10 new greenfield centres in CY21 with a capital outlay of approximately $4 million.

Key Risks: The group continues to witness the impact of COVID-19 related movement restrictions on its revenue and EBIT with $0.8 million of fees waived in YTD CY21 to support families. Further, it expects the sustained impact of COVID-19 on occupancy level as COVID-19 support measures are ceased.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

Despite a stronger opening for the ongoing week, the stock gave softer close around 61.8% retracement level of $0.967 at $0.98. The technical indicator RSI with a reading around 37 and a flattish curve at the end suggests weak to flattish momentum for the stock.

Going forward, the stock may have resistance around the converging point of 20 periods SMA and 38.2% retracement level of $1.10 whereas support could be around $0.90.

Stock Recommendation: The stock declined by ~16.2% in 6 months and by ~17.6% in 3 months. It has made a 52-week low and high of $0.760 and $1.315, respectively and is trading towards the 52-week lower level.

We have applied EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a discount to EV/Sales Multiple (NTM) (Peer Average) considering its weak performance in FY20, cease of additional government subsidies, and the continued impact of COVID-19. For the purposes of relative valuation, we have taken peers like iCollege Ltd (ICT.AX), 3P Learning Ltd (3PL.AX), Think Childcare Ltd (TNK.AX), to name a few.

Considering the strong balance sheet, disciplined capital management, a healthy trend in occupancy level, strong liquidity position, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.98 per share, down by 1.508% on 7^th May 2021.

GEM Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Evolve Education Group Ltd

EVO Details

FY20 Results Highlights: Evolve Education Group Ltd (ASX: EVO) is one of the top players in providing early childhood education in New Zealand and Australia. As of 19 April 2021, the market capitalisation of the company stood at ~A$178.69 million.

The company has changed the balance sheet date to 31 December as compared to 31 March earlier during CY20, hence, its audited results for FY20 include the performance for 9 months from 1 April 2020 to 31 December 2020. For the full year, the company has reported a decline in revenue by 27% to $102.6 million in FY20 (i.e., for the 9 months ended 31 December 2020) as compared to the revenue of $140.6 million achieved during the 12 months ended 31 March 2020. Meanwhile, the company reported a net profit after tax of $7.6 million during the period as compared to the net loss of $13.3 million reported in FY 31 March 2020. Thus, the company managed to deliver a good result despite a challenging year with lockdowns and restrictions in both countries in Australia and New Zealand, and a shorter financial year.

Financial Snapshot (Source: Company Reports)

On an Expansion Mode: The company, on 5 March 2021, declared that it has contracted to acquire 10 childcare centres in Australia which have an overall licensed capacity of 816 children per day. Following the acquisition, the overall number of centres of the company increased to 116 in New Zealand and 20 in Australia.

Completion of Placement of Shares: The company, on 1 April 2021, declared that with a strong response from existing as well as fresh institutional investors, it has successfully placed A$21.7 million worth of institutional share. The company will utilise the funds from the placement to meet the growth requirements and to tap acquisition opportunities in Australia.

Key Risks: The operations of the company are exposed to various financial risks which include market risk as well as credit and liquidity risks. Besides, the health and safety risks of children also pose a concern for the company. Also, the Covid-19 had hurt its operations as its centres in New Zealand remained closed under alert level 4 and limited operations under alert level 3.

Outlook: The company has a healthy liquidity position following the issue of A$35 million of five-year notes in December 2020, of which it utilised the partial proceeds towards repaying the bank facilities from ASB. However, it intends to utilise the balance proceeds towards future acquisitions in Australia. The management highlighted that its healthy balance sheet will help the company undertake acquisitions in Australia besides maintaining its momentum in its operational enhancements in New Zealand. The management considers present market conditions favourable for centre acquisitions and market consolidation.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has given a softer close for the ongoing week at $1.115, forming a ‘Harami Cross’ suggesting bullish reversal of trend. The technical indicator RSI with a reading around 46 signals neutral to up momentum for the stock.

Going forward, the stock may have resistance around 20 periods SMA of $1.21 whereas support could be around the 50% retracement level of $1.04.

Stock Recommendation: The stock rose by ~26.7% in 6 months and ~53.1% in 9 months. It has made a 52-week low and high of $0.592 and $1.480, respectively. We have applied EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight premium to EV/Sales Multiple (NTM) (Peer Average) considering the rebound in its net earnings in FY20, business growth strategies, decent balance sheet with a healthy liquidity position and decent outlook.

Accordingly, we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.115 per share, down by 0.447% on 7^th May 2021.

EVO Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Note: 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 Valuation has been achieved and subject to the factors discussed above.

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