G8 Education Limited

GEM Details

Business Update: G8 Education Limited (ASX: GEM) operates in childcare centres and manages its franchises in Australia. As per a recent announcement, the company's director Margaret Zabel has undergone a change of interest and acquired 11,000 ordinary shares of the company.

H1CY21 Financial Performance:

• The company has recorded a decline in its revenue by 2.0% to $421.5 million in H1CY21, compared to H1CY19, impacted due to lower occupancy and the absence of divested centres, partially offset by greenfield growth, and a February fee increase.
• Additionally, operating EBITDA was reported as $102.4 million in H1CY21, down by 6.1% from $109.0 million in H1CY19, reflected due to lower revenue.
• However, the statutory net profit has recorded a robust growth of 83.2% to $25.1 million in H1CY21 against $13.7 million in H1CY19, driven by lower rent due to a decrease in depreciation and a lower number of centres.
• The company has reported a strong increase in the cash position to $106.5 million in H1CY21.

Trend in Revenue (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 pandemic - The company is exposed to occupancy risk during the COVID-19 pandemic that has impacted its financial performance, and still, the uncertainty prevails.
• Regulatory Risk- The company has complied with the guidelines issued by the regulatory; any non-compliance could be a threat to its brand equity.

Outlook:

• The company is focused on regaining and attracting families to maximise the anticipated increase in occupancy.
• The company is initiating its strategic steps like executing different programs, covering training, reporting, system enhancements, and network growth to support and drive growth.
• The company has executed a lease agreement for ten greenfield centres and expect to open during CY22.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of GEM is trading below its average 52-weeks' levels of $0.922-$1.315. The stock of GEM gave a negative return of ~6.18% in the past one week and a negative return of ~21.69% in the past nine months. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers' average, considering the uncertainty of the COVID-19 pandemic and decrease in net margin. For the purpose of valuation, peers such as Think Childcare Ltd (ASX: TNK), Mayfield Childcare Ltd (ASX: MFD), Shine Justice Ltd (ASX: SHJ) have been considered. Considering the current trading levels, indicative upside in valuation, strong balance sheet, strategic programs, optimistic outlook, relief in lockdown restrictions and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $0.930, as on 9 September 2021, 3:59 PM (GMT+10), Sydney, Eastern Australia.

GEM Daily Technical Chart, Data Source: REFINITIV

Vita Group Limited

VTG Details

Change in Director Interest: Vita Group Limited (ASX: VTG) is a retail business that commercialises telecommunication, computer-related products and services in Australia. It also operates in Skin-Health and Wellness that includes medical-grade skincare treatments and lifestyle apparel etc. Recently, the company’s director, Maxine Joan Horne, has undergone a change of interest and disposed of 318,750 performance rights which got expired in accordance with the Vita Group Performance Rights Plan.

FY21 Financial Performance:

• The company has recorded a decline in its revenue by 18% to $633.5 million in FY21, compared to FY20. The revenue was impacted due to challenges faced during the COVID-19 pandemic in retail ICT.
• However, EBIT grew by 8% to $40.3 million in FY21 against $37.2 million in FY20, driven by proactive COVID-19 management and positive contribution from Artisan.
• The company reported a profit of $26.3 million in FY21, up by 17% from $22.4 million in FY20.
• In addition, despite COVID-19 pandemic conditions, the demand for skin-health and wellness categories remains strong.
• The cash position of the company stood at $38.20 million as of 30 June 2021 with bank debt of $7.2 million.

Trend in Net Income (Source: Analysis by Kalkine Group)

Key Risks:

• The company has faced challenges in the retail ICT during the COVID-19 pandemic that has impacted its financials, and still, the uncertainty prevails.
• The company’s Sprout accessories business has been impacted due to lower hardware volume across the broader Telstra branded network. Therefore, it needs to strengthen the brand through innovation and quality.

Outlook:

• The company intends to drive further organic growth and carefully manage expenses to mitigate the impact of the COVID-19 outbreak.
• The company is focused on adding value to customers and providing exceptional service. Further, deliver a long-term potential in Artisan and positioning itself at the premium end of the market.
• VTG continues to plan an exceptional client outcome by attracting, developing and retaining clinical talents going forward.

Stock Recommendation: As per a recent announcement, the company has decided to distribute dividends at the price of $0.024, with the ex-date is 9 September 2021 and payable on 24 September 2021. The stock of VTG is trading below its average 52-weeks' levels of $0.770-$1.180. The stock of VTG gave a negative return of ~9.74% in the past one month and a negative return of ~20.72% in the past one year. On a TTM basis, the stock of VTG is trading at an EV/Sales multiple of 0.3x, lower than the industry average (Specialty Retailers) of 3.2x, thus seems undervalued. Considering the current trading levels and valuation on a TTM basis, decent balance sheet, lower asset-to-equity ratio, increase in bottom-line growth, optimistic outlook and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $0.870 as on 9 September 2021, 1:23 AM (GMT+10), Sydney, Eastern Australia.

VTG Daily Technical Chart, Data Source: REFINITIV

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 for 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 the 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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