G8 Education Limited is a childcare center operator, with more than 400 centers in Australia and a small number in Singapore. The company has made a significant number of acquisitions since 2009, with many of these at very attractive prices. These acquisitions in addition to the ability of management to increase occupancy rates whilst containing a lid on expenses have driven strong growth in earnings. Looking forward, the bulls argue this growth will continue, underpinned by further acquisitions, cost control and cost advantages stemming from increased scale.
The bears point to a number of risks including the likelihood of competitive pressures in bidding for new assets, the threat to occupancy levels from rising unemployment, possible changes to childcare rebates, and weak equity markets tempering the company’s ability to tap capital markets to fund new acquisitions. While these risks should not be downplayed, we have confidence in the ability of management to circumnavigate issues given their strong track record. We believe the current share price offers an excellent entry point into this company.
The company is paying 8.3% yield and has an upside price target of 12%. With both major parties now promising increase in day care subsidies G8 is in prime position to improve performance over the long term.