Company overview - G8 Education Limited provides developmental and educational child care services. The Company's principal activities include the operation of early education centers owned by the Company and its subsidiaries, and the ownership of early education center franchises. It provides quality care and education facilities across Australia and Singapore through a range of brands. The Company's portfolio consists of approximately 490 in Australia and over 20 in Singapore. These centers provide a total combined licensed capacity of approximately 38,710 places. It offers brands, such as First Grammar, reative Garden, Kindy Patch Kids, buggles, Sandcastles, World of Learning, jellybeans, Kinder Haven, Pelican Childcare, Nurture One and Penguin Childcare. The Company's subsidiaries include Sydney Cove Children's Centre B Pty Ltd, Sydney Cove Property Holdings Pty Ltd, World Of Learning Licences Pty Ltd, Kindy Kids Operations Pty Ltd, Alfoom Investments Pty Ltd and Cherie Hearts Corporate Pte Ltd.


GEM Details

Early redemption of outstanding notes: G8 Education Limited was intending to use the proceeds from the recent equity placements totaling $195,657,783 to assist in repaying debt and strengthen its balance sheet. It has completed the revised tranche-2 placement (represents the final stage of the investment by CIPI originally announced on 20 February 2017) to CFCG Investment Partners International (Australia) Pty Ltd (CIPI). Under the CIPI Placement Revised Tranche 2, CIPI has subscribed for and been issued 8.2 million shares at a price of $3.88 per share, representing $31.8 million of proceeds to G8. The revolving Bankwest $50million facility which expires in December 2017 has been repaid and remains available to draw. The company will exercise its right of early redemption in respect of all its $70m 7.65% fixed interest notes due 7 August 2019 (ISIN: AU3CB0212140). The redemption of the Notes will occur on 7 August 2017 (Redemption Date), and noteholders will receive, for each Note, an amount equal to 102% of the outstanding principal amount of the note. Noteholders will also receive the interest payable on the notes for the period ending on the redemption date. In accordance with the terms and conditions of the notes, the repayment of principal for the redemption of the Notes will be made to each person registered in the Register at 10.00am on the 7 August 2017 as the holder of the note. The final payment of interest on the notes will be made to each person registered in the Register at close of business on the applicable record date (being the eighth day before the Redemption Date) as the holder of a note.


Capital structure; (Source: Company reports)

Increasing prices, while focusing on costs to offset the occupancy pressure: On results front, GEM expects to generate an underlying EBIT of mid-to-high $170’s million despite pressure in occupancy levels for FY17. The group has been increasing prices, while focusing costs to offset the occupancy pressure. Further, it has highlighted that EBIT and margins are tracking ahead of schedule. GEM is positive on reducing the gearing (Net Debt/EBITDA) from 2.2 times to 1.1 times (through the recent capital raising), to have an improved balance sheet flexibility to pursue growth plans. Further, the launch of “Jobs for Families” childcare package would enable to achieve a more affordable and accessible child care.


Occupancy - LFL; (Source: Company reports)

G8’s trading performance for the 4 months to April 30, 2017 has been in line with estimated underlying EBIT for FY2017 of around mid to high $170 million. However, on a rolling 12-month basis, G8's like?for?like occupancy as at the end of April was down by 3.4% yoy to 77.7%, due to industry supply increases, weaker demand in select markets and select center?specific issues. However, the impact of lower occupancy has been offset by price increases as well as strong cost control which, through active management, resulted in an improvement in underlying EBIT and EBIT margin. January trading performance was slightly ahead of budget and last year, although occupancy challenges in ACT, North Queensland and WA remain. Overall occupancy is broadly in line with last year. Delivery of the Group’s strategy is on track, with new KPI and Incentive. The 3-year LDC Funding program was completed in December 2016, accordingly, there will not be any LDC Funding Revenue from FY17 onward. There are 28 acquisitions scheduled to be completed during the year for a total cost of approximately $80m, with annualized EBIT of circa $20m. Due to the timing of acquisitions, 2017 EBIT contribution from these acquisitions is forecast to be approximately $7m.


Group Centre Network; (Source: Company reports)

Oversupply of childcare centers: Recently, industry report has revealed concerns over number of Childcare centers in Australia and their proximity in a region as per March quarter update (about 1.6% rise in supply). GEM in has responded to ASX Query stating that the group is not aware of any information not announced to the market and concerning the trading pattern during the period. On the other hand, GEM continued to deliver decent results and posted a meaningful rise in FY16 against the prior corresponding period. Underlying EBIT also enhanced 10.5%, boosted by organic growth in the second half while acquisitions performance was on track.

Robust FY16 Results: For FY16, G8 Education Ltd (ASX: GEM) reported a revenue growth of 10.2% yoy to $77 million driven by fee increases and acquisitions in 2015 and 2016.  Underlying EBIT growth in 2016 was 10.5%, with growth increasing to 11.6% in H2 as wage and other cost efficiency momentum that was built in H1 continued into H2, while 2015 and 2016 acquisitions performed in line with expectations to deliver EBIT contributions of $21.5m and $8.4m respectively. Underlying NPAT grew by 7.1% for the year, lower than EBIT growth due to higher financing costs, and prior year includes a gain on sale of shares in Affinity of $7.3m after tax. EPS growth improved from (2.5%) in H1 to 6.8% in H2. Further, company’s leverage position improved with the extension of SGD bond and bank working capital facilities by two years. For FY16, debt on balance sheet decreased by $44m with the repayment of unsecured note facility. During FY16, acquisition activity was lower with 21 centers being settled against 44 in the FY15. On the other hand, investment in existing centers refurbishment increased by $4million. The Group managed to implement several operational process improvements during the year to improve second half performance. The Group’s ability to convert earnings before interest, tax, depreciation and amortization (“EBITDA”) to cash remained strong with 97% cash conversion in 2016, generating operating cash flows of $109 million.


FY16 Financials summary; (Source: Company reports)

Recommendation: The stock has moved up 4.7% over the past six months, while it is marginally down (-0.53%) in the last one year. The stock has a decent dividend yield of 6.35%, while the group has built a strong brand reputation in the childcare centers in Australia and continues to make investment for center upgrades and refurbishments. We give a “Buy” recommendation on the stock at the current price of $3.79


GEM Daily chart; (Source: Thomson Reuters)

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