G8 EducationInvestor day: FY19 EBIT guidance down 6-8%, FY20...

G8 Education

Investor day: FY19 EBIT guidance down 6-8%, FY20 growth now 1-2%

Last week, GEM hosted its 2nd annual investor day. Unfortunately current year guidance has again been lowered, with FY19 EBIT reduced to $131-134m from $140-145m prior. In addition, looking into FY20, we now have 2 drivers, 1) an 80 centre turnaround program and 2) the maturing of the Greenfields investment. However, commentary that the $10m incremental cost of the turnaround program is to be funded by benefits of the program, as well as Greenfields growth, highlights that more cost and lower growth EBIT, remains the story into FY20. We have reduced FY20 EBIT by c14% and now forecast $134m EBIT, implying modest 1-2% growth. Retain Hold.

FY19 EBIT guidance down 6-8%

▪ FY19 EBIT has been reduced to $131-134m from $140-145m prior, driven by lower occupancy (now c+1ppt vs pcp vs mid-1s prior) and c$3m higher wage costs vs prior expectations. Of note, incremental earnings from Greenfields acquisitions were noted as broadly ‘on-track’ with previous guidance. However, c10 centres are now expected to open in FY20 vs 2H19, which impacts per centre optics and capex timing.

We now forecast FY20 EBIT growth of 1-2%

▪ GEM announced an 80 centres turnaround program to deliver an indicative $15m EBIT uplift by FY21-22. Non-recurring costs of $10m are expected in FY19, which will be funded by programme benefits and the ramp up of Greenfields. We now estimate incremental EBIT from Greenfields of c$4m vs $10-13m previously, with the reduction largely driven by the delayed openings in FY20.

PT reduced to $2.00, retain Hold.

▪ On our forecasts, GEM is currently trading on FY20 EV/EBITDA multiple of 7.8x and EV/EBITDA + capex multiple of 10.4x (pre-AASB16). Our $2.00 PT implies 8.0x and 10.6x respectively.

Last Price

A$1.94

Target Price

A$2.00 (Previously A$2.40) Recommendation HoldRisk

Higher

Education Services

ASX Code GEM 52 Week Range ($) - Market Cap ($m) 887.0 Shares Outstanding (m) 458.4 Av Daily Turnover ($m)

3 Month Total Return (%) -25.3 12 Month Total Return (%) -31.9 Benchmark 12 Month Return (%) 18.1 NTA FY19E (¢ per share) -72.0 Net Debt FY19E ($m) 345.6

Relative Price Performance

130 120 110 100 90 80 70 60 Nov-18 Feb-19 May-19 Aug-19 GEM S&P/ASX 200

Key Financials

Year-end December ($)

FY17A

FY18A

FY19E

FY20E FY21E

Source: FactSet

NPAT (C) ($m) 92.4 - NPAT (OM) ($m) 66.5 70.7 EPS (C) (c) 20.2 - EPS (OM) (c) 14.5 15.2

Source: OML, Iress, G8 Education Limited

Jules Cooper

Senior Analyst
(03) 9608 4117 [email protected]

Consensus Earnings

FY19E FY20E

Revenue ($m) 795.5 855.6 900.2 920.4 955.3

EBITDA ($m) 170.1 152.7 263.7 277.2 305.3

EBIT ($m) 156.1 136.3 162.8 167.8 191.1

Reported NPAT ($m) 80.6 71.8 64.7 70.7 86.1

Reported EPS (c) 18.9 15.9 14.1 15.2 18.2

Normalised NPAT ($m) 93.0 79.4 66.5 70.7 86.1

Normalised EPS (c) 21.8 17.5 14.5 15.2 18.2

EPS Growth (%) (11.7) (19.6) (17.2) 4.8 19.4

Dividend (c) 28.0 12.5 13.1 13.7 14.3

Net Yield (%) 14.5 6.5 6.7 7.1 7.4

Franking (%) 100 100 100 100 100

EV/EBITDA (X) 6.7 7.7 4.7 4.5 4.0

Normalised P/E (x) 8.9 11.0 13.3 12.7 10.7 Normalised ROE (%) - - - - -

Source: OML, Iress, G8 Education Limited