Could someone explain Julia Lee's (from Bell Potter) logic to me? This is from AAP on 22 feb:
-- Ms Lee said investors were questioning whether G8 could maintain its rate of acquisitions now that childcare waiting lists had shown signs of easing. "Childcare was an attractive investment a couple of years ago when there were waiting lists of more than a year but since then there's been more competition to G8's roll-out model," she said. --
So, according to Julia Lee, G8's (or any firm's) ability to acquire centres is negatively correlated with waiting lists at those centres? i.e., it is easier/cheaper for G8 to acquire centres that have long waiting lists?
Isn't the opposite true? Owners are more willing to sell and at a reasonable price when their centres are underutilized, not bursting with demand. Of course, if the lack of demand is structural (poor location, poor reputation, etc), G8 and others would steer clear. Also, if the industry is experiencing long wait lists, wouldn't that motivate other firms to enter the market, which would hike up acquisition prices for those centres?
I'm also baffled why so many brokers are critical of G8's "roll-out" model. Strategy 101 says that firms have three main options for top line growth: (1) increase utilization (first choice, usually, but limited in regulated environments); (2) expansion (build new centres); and (3) acquisition (buy centres). Each strategy works better under different circumstances. Option #3 (G8's current preferred approach) is better when acquisition prices are lower than the alternatives AND integration is cost effective and quality can be maintained AND building has higher risks due to hiring/developing quality staff, securing right location, getting regulatory approvals, and so on. As long as the industry is ripe for consolidation, option #3 works.
No one complains that Transurban's recent growth has mainly been through roll-out. It has been cheaper to buy various infrastructures (tunnels, airport links) and to guarantee integration of infrastructures (Brisbane system) than to start from scratch.
And in case anyone missed it, the departed CFO isn't just looking for acquisitions. He is also looking at the potential for building centres (option #2). "Specifically, Chris will engage with G8 as preferred supplier in the acquisition of existing centres and the development of premium new centres in strategic locations."
Finally, G8 has been showing in its reports that there is some top line potential in #1 (utilization). Not just higher prices, but some growth within centres (value-added services?, longer hours?)
So, do your own research, and beware of brokers with simple and potentially illogical explanations.
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