G8 Education Limited

GEM Details

Greenfield Strategy Update: G8 Education Limited (ASX: GEM) provides early education and childcare services via its own and franchise-owned education centres. As of 14 July 2021, the market capitalisation of GEM stood at ~$843.15 million. On 16 June 2021, GEM announced an updated strategy for the company’s legacy greenfield program. The company announced its decision to open a few new greenfield centres every year in partnership with good developers. In addition, GEM has decided to separate the greenfield cohort from the core portfolio. GEM announced an EBIT of $10.6 million for CY20 with 70% average occupancy in 31 centres of Greenfield. The company expects to generate more than 20% ROI on reaching maturity on the 70% of the previous greenfield portfolio.

Key Takeaways from FY20:

• A Decline in Revenue: The company reported $788.35 million of revenue in FY20, down by 15% YoY due to the adverse impact of COVID-19. The net profit to the shareholders was recorded at $187.01 million in FY20, down by 460% YoY. This decline in NPAT is due to a non-cash impairment expense of $237 million.

• Reduced Finance Costs: GEM reduced its net finance costs by ~$9 million in FY20 versus FY19. The realised savings are because of the restructuring of borrowing facilities in February 2021.

• Improved Net Cash Flows: The company generated $189.56 million of net cash inflows in FY20 versus $153.99 million in FY19. GEM held a higher cash balance of cash and cash equivalents of $316.98 million as of 31 December 2020, as compared to $40.60 million as on 31 December 2019.
• Dividend Distributions: The company paid 6.0 cents per share of dividend for FY2019 on 30 October 2020. GEM has suspended the dividend payment and will review the policy in August 2021.

Revenue Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of closure of centres, low attendance due to the massive impact of COVID-19 on the sector. GEM also faces the risk of raising adequate funds to scale up, open new centres, and remain viable.

Outlook: GEM has decided not to declare an interim dividend for CY2021 and intends to pay the total CY21 dividend in March 2022. The company has decided 50-70% dividend payout from NPAT. Given the improved tenor of debt facilities to FY23, recent capital raise of $301 million, and the Federal Government’s continued funding support to the sector as per the 2021-2022 Budget, the Group believes it is well-capitalised to execute its current strategy.

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 gave a negative return of 14.19% in the past six months and a positive return of 21.29% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.760 - $1.315. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount than its peer median, considering its lower revenue and net loss in FY20 and the risks associated with the COVID-19. For this purpose, we have taken peers like 3P Learning Limited (ASX: 3PL), Think Childcare Limited (ASX: TNK), Mayfield Childcare Limited (ASX: MFD) under the Diversified Consumer Services segment. Considering the current trading levels, increase in net cash inflows from operating activities, restructuring savings of ~$9 million, restoration of dividends for CY21, refreshed greenfield strategy for 2021, valuation, and associated risks of COVID-19 causing centre closures and low attendance, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.980, down by 1.508% as on 14 July 2021.

GEM Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision 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.

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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