G8 Education Limited

 

GEM Details

Sale Of 25 Centres in Western Australia: G8 Education Limited (ASX: GEM) is primarily engaged in the operation of the early education centres, which are owned by the group. The company also operates early education centre franchises. The company has entered into an agreement to sell 25 centres in Western Australia to Sparrow Early Learning Pty Ltd for approximately $6.4 million, equating to an CY19f EBIT multiple of around 4.1x,completion of which is targeted to occur in December 2019. The fund will initially be used to repay debt with a view to ultimately recycling proceeds into growth opportunities as they arise. The divestment will result in an overall portfolio occupancy uplift of greater than 1% pts and an occupancy uplift of 10% pts for the company’s centres and it will realise substantial capex savings along with an annual cost reduction of $330k per annum.

Accelerating Performance: For CY20, the company expects acceleration in EBIT growth, mainly due to centre turnaround program, portfolio optimisation, ramp up of Greenfield occupancy and EBIT and non-recurring costs of $10 million to drive growth and the costs are expected to be financed by the program benefits in CY 2020. Revenue for 1H19 increased by 9% to $430.6 million, driven by increased occupancy, fee growth and acquisitions. Underlying EBIT of $51.6 million was in-line with half year consensus forecasts and is 7% above the prior corresponding period.

Statutory profit after tax for the half year reduced by 20% to $19m due to implementation of AASB 16 Leases Standard. The company also managed to complete its restructure of balance sheet and repaid SGD $270m bonds, funded by syndicated debt facilities. The company also declared a fully franked dividend of 4.75 cents per share on ordinary fully paid shares which was paid on October 3, 2019.


Financial Performance (Source: Company Reports)

What to Expect: The company provided guidance in the month of August 2019, which was predicted upon occupancy growth of mid 1% pts and wage efficiencies. G8 Education Limited expects its full-year underlying EBIT (pre-AASB16) to be in the range of $131 million to $134 million. The impact of AASB16 will increase this EBIT range by approximately $30m for the year.

Stock Recommendation: As per the ASX, the stock declined 8.48% in the past six months but gained 1.17% in the past one month. Net margin and ROE (Return on Equity) of the company for 1H19 stand at 4.4% and 2.2%, respectively. Considering its focus towards accelerating performance, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of A$2.130 per share, down 17.761% as on 14 November 2019, owing to the update related to the sale of 25 centres in Western Australia.

 
GEM Daily Technical Chart (Source: Thomson Reuters) 

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