G8 Education Limited

GEM Details

G8 Education Limited (ASX: GEM) provides childcare services through the operation of early childhood education centre franchisees in Australia and Singapore. It has over 472 education centres in Australia. Its branded centres include ellybeans, buggles, Creative Garden, Kinder Haven, headstart, The Learning Sanctuary, Greenwood and Pelicans.

Material Business Updates:

• As per the announcement on December 24, 2021, Host-Plus Pty Limited, as trustees of the Hostplus Pooled Superannuation Trust, made an additional purchases of GEM shares, and voting power has been increased from 5.48% to 6.54%.
• Changes to the Board: Mr Mark Johnson retired as Chair, and he is succeeded by Mr David Foster, who is the Director of GEM and the former COE of Suncorp Bank. It had appointed Ms Debra Singh and Ms Toni Thornton as Non-Executive Directors.
• GEM welcomes the federal government grant of additional 10 allowable absences per child for FY22 and waiver of parent gap fees.
• Completion of Leor acquisition: On October 1, 2021, GEM completed the acquisition of Leor Pty Ltd. The acquisition was announced on September 20, 2021, for upfront cash consideration of $2 million and additional contingent consideration of $9.5 million payable in the next three years from CY22 to CY24. The acquisition helps GEM to foray into in-home childcare and specialized NDIS segments for children.

CY21 Trading Update:

• Higher Profitability: GEM clocked CY21 YTD (ending to November 30, 2021) EBIT of $76 million (including lease adjustments) and operating NPAT of $43 million, higher than the consensus estimate.
• An Uptick in Occupancy: Core Occupancy stayed above 1.7 percentage points to CY20, reaching 76.5%. But it is lower than the pre-pandemic level of 78.6% in CY19.
• The government has provided support to the sector to the tune of $21 million in CY21 through Gap Fee Waivers.
• GEM is expecting to open 13 new centers in CY22 through greenfield investments. Steady progress in closing as much as 21 impaired centers stand completed.

Core Occupancy Rate in Australia (Source: Analysis by Kalkine Group)

Key Risks: GEM is highly dependent on government grants for enrolment. Closure of centres in NSW and Victoria owing to increased virus spread lead to lower attendance and top-line growth. Labour shortages, higher costs of funds, and unemployment levels are the near-term headwinds.

Outlook: Leor is trading in line with the expectations, although earnings contribution to CY21 will be minimal. GEM is focused on planning and securing resources to support the growth strategy for Leor in CY22. In a measure to turnaround operations, GEM implemented a remuneration hike, service awards recognition program, G8 Study Pathways Program. It had rollout the Improvement Program in over 223 centres, and an additional 137 new centres were inducted into the program.

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 delivered a positive return of ~13.26% in the past six months. The stock is trading higher to the average of the 52-week low price of $0.922 and the 52-week high price of $1.250. On technical front, GEM has a support level of $1.01 and resistance of level of $1.19. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in percentage terms). The company might trade at a slight discount to its peers, considering the increased risk of virus spread and lockdown fears which may invariably influence the occupancy rate. For valuation, a few peers like 3P Learning Ltd. (ASX: 3PL), Mayfield Childcare Ltd. (ASX: MFD), Cluey Ltd. (ASX: CLU), and others have been considered. Considering the rally in stock price, valuation indicating correction, current trading level, and key risks associated with the business, we recommend a “Sell” rating on the stock at the closing market price of $1.110, up ~4.225%, as on 31 January 2022.

GEM 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 is subject to the factors discussed above alongside support levels provided.

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