G8 Education

Signs of improvement: G8 Education Limited (ASX: GEM) disclosed the market that they have witnessed the occupancy growth in July and August. Moreover, even during the first half when the company suffered low occupancy, its fee has increased. As of now, the company is focused on improving its strategy, making an investment in the technology and adopting the new changes in the sector. Operational changes made by the company would help it to increase the quality of its offering. We expect that in the long run, parents would be unfazed by the abrupt growth of the centers and would rather opt for the established names, proven of providing quality service and meeting regulatory standards. Moreover, the low margin players are expected to leave the space in the future, leaving more ground for the bigger players like G8 Education. On the financial front, the company posted higher revenues in first half of FY18 while underlying NPAT took a nosedive of almost 23.9% from the previous corresponding year. Revenue for the company came in at $396.4 million, an increase of 7.6% over $368.3 Mn in the 1HFY17. Underlying NPAT was down 23.9% at $25.6mn compared to $33.7mn in the previous corresponding year. Growth in revenue was underlined by new centers, an increase in fees and acquisitions. However, the increase in the wage costs pertaining to the regulatory changes eroded the bottom-line numbers. Based on the performance, the Board of Directors declared six months fully franked dividend of 4.5 cents per share and it will be payable on October 05, 2018 with the record date of September 14, 2018. This brings the total full-year dividend to 14.5 cents per share.


National Long Day Care Supply (% change YoY) (Source: Company Report)

Share performance: Shares have taken a hit, generating a negative Year to date return of 39.94%. The stock price almost halved from the $4.7 to around $2 over a period of almost one year. Sector-wide challenges have not spared G8 Education with share price reflecting the same. However, we believe that the stock has bottomed out and presents a good opportunity for the investors to take fresh entry at the current levels. Momentum strength indicator (relative strength indicator) has come out from the oversold zone and showing sign of some stability. The stock is trying to hover around its long-term support level of $2.016 and is expected to hold-on to that. Size of the company, conservative gearing policy, early adoption of the regulatory framework, improving operational efficiency and achieving economies of scale are the factors that may drive the growth for G8 Education in the quarters to come. Bellwether status of the company in the sector can expose it to the positive changes sooner compared to the smaller players, as and when they occur, while there is an oversupply of new centers and the sector is due for some balancing post the avenues set through new subsidy. We recommend a “Hold” on the stock at the current market price of $ 2.070.
 

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