G8 Education Ltd (GEM)

By Jason Fittler

G8 Education Limited is a childcare centre operator providing developmental and educational childcare services mainly in Australia.

G8 conducts a range of childcare service activities, including the acquisition of childcare centres, the management of childcare centres, industry-related project management, services and consultancy.

G8 also operates childcare centres, both owned and franchised, in Singapore.

The heavily fragmented childcare industry should experience further consolidation.

Industry revenues are set to grow steadily over the medium term as key drivers continue to be supportive, with increasing female workforce participation, growing awareness and belief in developmental benefits, increase in child population and increasing affordability via increased government funding.

It is uncertain at this stage what resemblance the Government's policy will bear to the Productivity Commission recommendations. However, reports from the media indicate the Government has been broadly receptive to the recommendations.

We expect the policy to be revealed alongside or in the lead-up to this year's Federal Budget.

The uncertainty around how the Government will incorporate the recommendations of the policy means we have not changed our 12-month forward DCF of $6.22.

This stock is currently paying a gross dividend of 8.4%, but investors should be cautious, as this is a payout of around 90% of cash earnings per share.

At present around 30% of this dividend is paid through a dividend reinvestment plan, which dilutes the value, your shares.

They are also able to continue with such as high payout ratio due to intuitions being issued shares.

The concern is if interest dries up they will need to borrow for acquisitions, which will see cuts in dividends.

Short-term the company looks like a good. But pending changes to legislation expected in the May budget which will affect the company.

For investors, you receive a high dividend yield and capital growth.

But keep an eye on this one.

For more information about G8 Education Ltd (GEM) please contact us on 07 4771 4577.