So has anything changed in the business model since 2015 when this article was published in The Intelligent Investor? (By one of the more knowledgeable-sounding YMYC experts btw.)
"Right now, my most reviled business is G8 Education. I recognise that the business employs over 6,000 people who are no doubt decent and work hard. Yet I cant help loathe the business model."
"There are few, if any, synergies from owning multiple child care centres. Staff numbers are regulated and centres themselves aren't scalable. You cant funnel more children in without increasing costs and you cant share costs (apart from head office). There is no one brand name to build or operating leverage to exploit. "
"It creates no value and does little more than engage in 'multiple arbitrage', taking advantage of the fact that listed businesses are valued more highly than unlisted ones. Regardless of the success of the strategy, this is a cynical, crappy way to make money. "
"The rate of return, however, is still poor. G8 generates a return on assets of just 7%. This will surely come under pressure because multiple arbitrage can be easily replicated. Newly listed peers (eg Affinity) are now capitalised to compete with G8 and will work to lift acquisition prices and lower returns. "
"The entire model depends on continuing the acquisition spree so there is a strong incentive to overpay."
"This business should not be worth any more than the sum of the acquisitions G8 has made yet it trades at almost 4x net asset value. I see no reason for the premium. "
GEM Price at posting:
$3.40 Sentiment: Sell Disclosure: Not Held
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