AFR: ALP's $1.75b childcare plan adds up for deal-making ASX groups

ASX-listed Mayfield Childcare will spurn national expansion and stick to its home state of Victoria for acquisitions in a market where better occupancy rates are likely to be bolstered further if the Labor Party wins the federal election.

RBC Capital Markets predicts an ''occupancy tailwind'' will come from the Labor's $1.75 billion proposal to guarantee 15 hours a week of education for three- and four-year-olds, in a sector that is still highly fragmented.

Think Childcare entered into a trading halt on Monday as it undertook a placement to raise $18 million to acquire four centres in Perth and to bolster its balance sheet as it expands the upmarket Nido brand. The proposed fundraising, at $1.58 per share, was first reported by Street Talk in The Australian Financial Review.

Think has also said it is planning a further six acquisitions late this year.

Mayfield and Think are small operators compared with the largest Australian Securities Exchange-listed childcare group, G8 Education, which runs 500 centres in Australia and 20 in Singapore.

Sentiment surrounding G8 also has largely improved, with stock rising to $3.63 on February 22 from $1.91 in late October. It has retreated below $3 in the past month.

Mayfield chief executive Dean Clarke said on Monday that conditions were generally better than in 2018, and his group was on the lookout for extra acquisitions. "There's a lot of opportunities,'' he said.

Mayfield listed on the ASX in late 2016, and runs 20 centres in metropolitan Melbourne.

Mr Clarke said Mayfield would stick to the Victorian market and had no aspirations to expand into a national network.

"I think there's plenty of scope here,'' he said.

The sentiment in the childcare sector had been slowly improving after a difficult market last year because of an industry oversupply and some uncertainty about just how a new federal government subsidy scheme, introduced in July, would play out.

"The middle of last year was a period of confusion,'' Mr Clarke said.

RBC Capital Markets analyst Garry Sherriff said should Labor win the election, the timing to implement its childcare proposals was unclear, but the changes were a positive for the industry. Prime Minister Scott Morrison has indicated the election will be in May.

'Occupancy tailwind'

The plan to guarantee 15 hours per week of education nationally for three- and four-year-olds was an ''occupancy tailwind'' because it would increase demand.

A second Labor policy of removing upfront course fees for 10,000 early-education TAFE courses would help stimulate the supply of new childcare workers.

RBC has a 12-month price target of $3.50 per share on G8 Education, and said occupancy was trending in the right direction.

Think managing director Mathew Edwards said on Monday that the initial purchase costs for the four centres in Perth totalled $6.8 million, and average daily fees per child were $117 across 308 licensed places.

The centres were acquired on an enterprise value-to-earnings earnings before interest, tax, depreciation and amortisation multiple of four times.

The centres were all built in the past two years.

The capital raising would increase funding flexibility for further acquisitions and provide Think with a ''capital runway to acquire, develop, upgrade and execute on the premium Nido brand transition'', Mr Edwards said.

The capital raising is being handled by Cannacord Genuity and Wilsons.