3:25pm: Schroders’s senior portfolio manager for small companies, Marcus Burns, has a nice note out today warning against high valuations in sectors reliant on government largesse, and draws an unflattering comparison between a certain market darling and the ill-fated ABC Learning….
In a slowing Australian economy that looks likely to be running budget deficits for the foreseeable future, we would flag the heightened risks around sectors which are heavily reliant on government funding (read largesse).
The two sectors we would point to are the government funded VET (vocational education training) sector (90% of revenues sourced from governments) and the childcare roll-up sector (50-60% of revenues).
The latter in particular makes us want to repeat the chorus line again. Although childcare centres are clearly a very necessary part of a working society, the extent to which the private sector has and is profiting from this space appears unsustainable. Operators in the space proudly report that pricing has risen at 7% p.a. compound for 10 years.
The reason parents haven’t been particularly fazed by these steep day care cost increases is due to the current government subsidies for childcare, in particular the non means tested CCR (child care rebate). The CCR and CCB (means tested child care benefit) now cost the government a staggering $5bn pa.
Critically the CCR costs over $2.5bn and this is the component that is growing the fastest.
Our current Treasurer has stated that the “age of entitlement is over” and is looking to cut the budget deficits. To that end the Productivity Commission is currently reviewing the child care industry and is due to make its submissions to the Government before October this year. Don’t expect an increase!
Equity holders have benefited disproportionately from a service that should arguably be delivered by the State.
G8 Education, the poster child for this space, now trades on 4.5x book value, coincidentally the same peak valuation reached by another child care centre roll up story that ended spectacularly poorly for investors in 2007.
A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.
(20min delay)