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G8 Education's profit loss not a disaster, says Morningstar

Glenn Freeman  |  28 Aug 2018Text size  Decrease  Increase  |  
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The childcare centre operator reported a $25.6 million in net profit for the first half of fiscal 2018, down 24 per cent from $33.7 million last year.

G8 Education's (ASX: GEM) revenue was up 7.6 per cent across the group, largely on the back of childcare centres opened in fiscal 2017 and in the first half of 2018. 

Underlying earnings before interest and taxes of $48.1 million was down 21 per cent from the same period last year.

The negative result fell short of Morningstar's expectations, though senior equity analyst Gareth James says G8's profits are generally weighted toward the second-half. "With more operating leverage in the first half, this result makes it look a lot worse than it is," he says.

Management has guided to a 6 per cent dip in EBIT for the full year, while James previously anticipated 1 per cent growth in this figure for fiscal 2018.

child care centre children

Front-loading of operating leverage makes this result look worse than it is

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"The real question mark is what is going to happen to occupancy levels? It depends what will happen with the Child Care Subsidy scheme," James says.

This $3 billion government boost for the child care sector came into force in July 2018.

Management indicates that, while occupancy growth in July and August is encouraging, and demand is forecast to improve as a result of the new CCS, the combination of supply conditions and regulatory change is unprecedented.

It doesn't anticipate an improvement in market conditions until mid-to-late 2019, with similar occupancy growth to continue for the remainder of 2018.

Fee increases of 5.5 per cent were implemented from 1 July, at the same time G8 management introduced government-mandated 3.5 per cent child care staff wage increases.

Dividend shift brought forward

Management declared a 4.5 cents a share dividend, fully franked, for the first-half, lifting its dividend for calendar year 2018 to 14.5 cents.

G8 has shifted to a proportionate dividend six months earlier than announced previously. From next year, it will pay out between 70 and 80 per cent of underlying NPAT in dividends.

"Future dividends are expected to be declared every six months, with the next dividend payment in early April 2019 based on the seasonally higher second half NPAT," it said in an ASX statement.

Morningstar's James sees this as ultimately a good thing for the business, in that it will no longer be paying out an unsustainable level of its free cash as dividends, "but of course, this isn't going to be good news to income investors".

He says this is a key reason for G8's share price decline, having fallen 14.5 per cent to $2.07 this morning in response to the result.

"The market hates it because here is a stock that has just cuts its payout … but it's still very early days.

"At the moment, the market is looking at it as a problem, but I always thought this would be a difficult period, because it's the last six months of the old CCS," James says.

He sees another upside in the result for the childcare sector more broadly: "A result like this from G8 will help discourage some new supply".

Fewer competitors would in turn mean less downward momentum on childcare centre fees.

G8 management has promised another trading update in October or early November, when it will hold its next investor day.

The company's share price was trading at $2.03 at time of publication, a 50 per cent discount to Morningstar's 20 April fair value estimate of $4.

 

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Glenn Freeman is senior editor, Morningstar Australia

Roger Balch is a freelance contributor for Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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