The essence of GEM’s current situation, from what I can see, is best summarised in slide 12 of today’s Investor Presentation:
View attachment 1260965
1) Total Organic Revenue (before acquisitions) in CY18H1 was flat (+0.5%) on pcp,
as fee increases were offset by the decline in occupancy.
2) On the other hand, all expenses (Wages, Rents and Other) were significantly higher (+5.8%, +2.9% and +10.5% respectively).
3) As a consequence, Organic Centre EBIT in CY18H1 was down 20.6% from pcp; what this means is that, on a like-for-like basis, the business is not only going backwards, but it is doing so in an accelerating way (Organic Centre EBIT in full year 2017 was down only 2.6% from 2016).
Management’s indication that the H1/H2 EBIT split in CY18 will be similar to the previous year is just another way of saying that, on a like-for-like basis, CY18H2 EBIT will also experience a similar drop from CY17H2.
While some of the cost increases may be one-off in nature (e.g. the impact from regulatory staff ratio changes), they are also unlikely to be reversed. Therefore, while the decline in Organic Centre EBIT might slow down going forward, it is highly likely to continue as long as the growth in Total Organic Revenue remains anaemic.
And, from just looking at the Average Monthly Occupancy graph on slide 10, the pick-up observed in July and August does not exactly look “above trend” to me; that is to say, it merely looks in line with the seasonal uptrend observed in previous years (but from a lower base), rather than showing evidence of a positive impact from the Child Care Subsidy kicking in.
View attachment 1260974
Therefore, my personal reading of today’s result is that there is no evidence of earnings stabilisation just yet.
From a valuation perspective, even if we take Management’s 34/66 guidance as a base case (and I do see clear downside risks to that being the outcome), that corresponds to a CY2018 Underlying Group EBIT of ~140m$. At its current price and factoring in 316m$ of Net Debt GEM would be trading at an EV/EBIT of (2.02$ * 453m + 316m$)/140m$ = 8.7 (corresponding to a FCF yield on EV of ~8.0%), which does not look like a sufficient margin of safety to me given the underlying downward trend in EBIT and the risks to H2 guidance.
Incidentally, in the event that H2 guidance did not materialise, GEM’s NIBD/EBITDA would possibly end up significantly higher than its current ~2.0x, which could put the Company under pressure to cut its dividends further.
Overall, this remains a wait-and-see situation for me, with many moving parts and not enough evidence of an incoming turnaround to want to initiate a position just yet.
IMHO, DYOR & GLTAH
(20min delay)