G8 Education Limited

Decent top line, however dismal bottom line performance:Quality care and educational facilities provider, G8 Education Limited (ASX: GEM) has operations across Australia and Singapore with a range of reputed and well-recognised brands. It wishes to become Australia’s leading high-quality development and educational child care service provider through expansion in its portfolio by making quality centres focusing on early childhood education management. Recently, the group posted a decent set of CY18 results in which revenue grew by 7.7 percent to $858.2 million as against $796.8 million in the last year. However,EBITDA decreased by 10.1% due to an increase in expenses such as employee and occupancy costs as compared to the previous period. Resultantly, Underlying Net Profit After Tax (NPAT) stood $79.4 Mn in CY18, exhibiting de-growth of 14.5 percent on a Y-o-Y basis. Despite the subdued performance inCY18, the Board of Directors has declared a fully franked final ordinary dividend of 8.0 cents per share (cps) and it will be payable on April 05, 2019 with the record date of March 15, 2019. It equates a dividend payout ratio of approximately 75% of NPAT.


Portfolio Metrics (Source: Company Reports)

As of now, the company focuses on ensuring the right talent pool, advanced systems, and infrastructure to position itself as the highest quality operator offering differentiated services to its customers. It remains committed to open 19 new centers (2 brownfields and 17 Greenfield) in CY19. It has completed around 16 greenfield centers in CY18 along with closures of 8 centers for portfolio optimization. It started CY19 with a positive note as occupancy growth reported at circa 2% YTD PCP and wages are performing in-line with expectations. Incremental earnings from prior year acquisitions to be circa $10 Mn in CY19.  The investment costs associated with the ramp-up of CY19 greenfield centers is likely to be $2 Mn in CY19. The company expects CY19 result will be affected by the cessation of annual license fee revenue of $4 Mn following the termination of the broker exclusivity agreement. Any fall in margin is anticipated to be absorbed by the improved Y-o-Y wage performance.

Stock Recommendation: GEM’s share price has generated a positive YTD return of 15.07% and is trading close to a 52-week higher level. It has made significant investments in its portfolio expansion and with the demand growing it expects a better return on investment in the forthcoming year. Hence, we maintain our “Hold” recommendation on the stock at the current market price of $3.20 per share (up 2.236% on March 04, 2019).
 

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