G8 Education Ltd (ASX: GEM)

GEM Details

Downgrade to earnings forecast: Shares of G8 Education plunged over 23% on December 04, 2017 at the back of the release of soft trading update on its performance for FY2017 along with changes to its executive leadership team. FY17 underlying EBIT is now forecasted to be of the order of $160m, which is indeed a 5% improvement on the prior corresponding period after adjusting for movements in Long Day Care Professional Development Program Funding. However, the group downgraded the improvement below the earlier forecast (to be of mid-$170 million) at the back of sluggish occupancy growth (with average like-for-like occupancy for FY2017 forecasted to be circa 77%, compared to 79.7% for FY2016) owing to supply issues in some areas like Western Sydney and Gold Coast and soft wage growth and employment conditions; regulatory requirements on staffing ratios during breaks in NSW, SA and Victoria with FY17 impost of utilising temporary agency labour to meet immediate requirements forecasted to be $3 million; and $1 million increase in the net outflows based on an accelerated training for G8 team members with LDCPDP Funding having an impact of $9m when compared to the prior corresponding period.

While some of these issues (such as those related to labour) are expected to neutralise over time and some will reap benefits in long term (including the expedited training initiative), the group is facing short-to-medium term issues with regards to earnings front.

On the other hand, GEM is tracking well with regards to its acquisition and development pipeline with FY16 and FY17 EBIT contributions of $13m and $3m, respectively. The Company also announced that it has completed the recruitment of its Executive Leadership Team with Greg Bowell joining the Company as GM- Marketing, and Rod Anderson to join as GM- Property in mid-January.

There is an expectation that conditions might move towards stabilisation in the long-term and we give a “Hold” on the stock at the current price of $3.40

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