(Un)Intelligent Investor Article, page-3

Stlamc thank you for sharing the article from Intelligent Investor.

1. "Staff numbers are regulated and centres themselves aren't scalable". The staff to child ratio is the largest cost factor in any childcare centre, they aren't scalable and at this time of year, when the majority of regional centres will be operating well below par staff costs will be crippling. A 2-3 room with 16 children requires 2 educators, if they have only 9 children enrolled they still require the same number of staff, 7 children x $90 = $630 reduced profit for that day. This will improve as the year progresses and children from younger age groups transition and other children enrol in the centre.

2. "Buying unlisted centres with low EBITDA creates no value and does little more than engage in multiple arbitrage". Totally agree with your sentiments on this one. A passionate motivated teaching director would be able to turn any childcare centre struggling with low occupancy around.

3. "There is no one brand name to build". This does concern me. Both of the large corporate seem very reluctant to advertise their ownership of centre. Drive around any major city or regional areas and identify the centres owned by either G8 or Affinity, you will be unable to find any centre that promotes ownership by either of those two corporates. G8 do have their centres listed on their website, but Affinity have removed their list of acquisitions, infact when I typed in my post code, it took me to a map of Mongolia.

4. "Few, if any, synergies from owning multiple child care centres". There are benefits to owning multiple centres, but it appears that both corporates are happy for centres to manage their own budgets. The larger expenditure items (like playground refurbishment, painting etc) are usually organised and carried out by contractors employed by the corporates head office. These contractors are normally from Brisbane and travel around various states carrying out the required refurbishment. With both corporates promoting in recent days (in light of the findings of the PC) their large holdings in outer metropolitan areas, wouldn't it be more appropriate to allocate the work to locals within their community and further promote their brand.

5. Growth by acquisition or growth by good management.

Corporates employ early childhood teachers as area managers, state managers, national managers. It's a business, it needs to trade more efficiently where are the business managers? Early childhood teachers know how to teach children, they don't know how to get the best returns for shareholders. The corporate who employs area business and marketing managers will gain the confidence of shareholders and streamline and control spending more efficiently.

All IMO. Look forward to Affinity's reporting tomorrow.