(Un)Intelligent Investor Article, page-56

Scorchin, thank you for the reply - I wanted to address the multiples point that you and II made.

First of all, paying 4x EBIT is cheap, even by private market standards. If I was a shareholder, I WANT GEM to buy at 4x - why I would I want them to pay more? Competition for acquisition targets in the long term will drive up these prices, however the fact that acquisitions currently can be done at 4x means there is a first mover advantage and multiple arbitrage. GEM should buy as much of these up as possible before prices rise (within financial and quality limits of course).

Also, GEM's multiple and their acquisition multiples are incomparable - you are paying a premium to get diversification, synergies, access to private market deals, as well as liquidity via the ASX. Can you get access to 4x EBIT in the private market? I highly doubt it - unless you invest in a private equity fund. On the ASX, you can pretty much forget it.

On the same vein, while 30x was too much, it's current valuation at 15x forecasted is about fair (and "maybe" low for a company that still can grow organically - no comment on this). The general consensus is that childcare is defensive, has stable earnings with growth potential and that supports the valuation at 15x - particularly given that the ASX is trading around 16x.

Looking at D/E ratio, GEM isn't that highly levered at 0.85 and interest coverage at 3x (again given its characteristics). Given the low rate environment (which will extend for some time), using debt to consolidate and drive acquisitions isn't a bad idea (Singaporean debt may be a spot of bother though).

As multiple other posters have noted re: regulatory, industry issues etc. - those concerns are valid and would affect the valuation of GEM. I merely wanted to point out that the strategy GEM is engaging in can be profitable and the current debt isn't as big as it is blown out to be (though should be monitored).