- At its AGM, management at G8 Education (GEM) stated that supply issues continue to impact occupancy with YTD like for like occupancy down 2.5-3%.
- GEM also acknowledged it will not achieve its 3 year EPS target (Dec-19) of 40c and will provide an update along with FY18 guidance at the 1H result in August.
- While the stock has de-rated further (trading on a FY18 PE of 11x) given the current industry conditions, taking a medium term view (and considering the transformation program underway) we maintain our Add rating.
- We expect catalysts include signs that occupancy is stabilising/increasing; evidence of success stemming from operational efficiencies/economies of scale; and positive outcomes from the new Government childcare funding (2H18/1H19).
Supply issues continue to put pressure on occupancy
At the AGM, management noted that ongoing supply issues continue to put pressure on occupancy with current year lfl occupancy down 2.5-3% (we note in February commentary suggested it would be down around 1-1.5%).
In 2017 the level of supply growth exceeded demand growth by around 2.5% and based on industry data, GEM estimates that new centre supply growth rate is forecast to be 3-3.5% in 2018. While this is lower than the pcp it remains above current demand of approx. 2% with the company expecting a better supply/demand balance to emerge in 1H19.
We had previously assumed 2018 average occupancy would be flat on the pcp (76.7%), however post the AGM update we adjust our assumption to 75% (changes overleaf).
Guidance to be provided with 1H result in August
Market conditions are expected to remain challenging in the near term (largely supply driven, however supply expected to moderate largely due to tightening credit), although the Federal Government's Jobs for Families Child Care Package (starting July 2018) is expected to drive demand (likely to see evidence in 2H18/1H19).
GEM has undertaken a review with PwC to assess the impact of the new package on its existing customer base with the analysis indicating that 95% of its existing families will be better off.
At the AGM management also acknowledged it will not achieve its three year EPS target (Dec-19) of 40c (Morgans was at 27.2c). It will provide an update on its 3 year target along with FY18 guidance at the 1H18 result in August.
Near term challengers however taking a medium-long term view
As outlined in our recent initiation report Transformation underway , GEM has made several new management hires, increased capex and is focused on a range of operational changes with the aim to improve the quality of its offering/centres.
While these measures won't immediately benefit earnings, we believe it positions GEM positively for the medium-long term which will also coincide with more favourable industry conditions.
Post changes, our valuation falls (Morgans clients can login to view) based on a blended DCF, PE and EV/EBITDA valuation. GEM is trading on a FY18F PE of 11x (vs XSO at around 15.9x) and offers an attractive fully franked dividend yield.
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Disclaimer(s): Analyst owns shares.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.