The Opinion of a Well Performing Fund Manager

The Smallco fund, based in Sydney. Had this to say about GEM.

G8 Education (GEM), Australia’s largest for-profit childcare services provider, is in our significant holdings list. SIF started buying GEM at the end of 2016 and with an average entry price of $3.30, it has been a good performer for SIF already this year (last $4.10). GEM is undergoing a transformation under a new management team and refreshed Board, which we believe will set the company up for a sustained period of earnings growth. GEM had been successfully following an aggressive acquisition based business model, however after its centre numbers doubled in 2014, the group started to show roll up fatigue through 2015/2016 (high debt, waning organic growth and narrowing valuation arbitrage potential), at a time when industry conditions had become more difficult. The new management team has reset the focus towards cost reduction, efficiency gains and organic revenue growth opportunities. These types of drivers had taken a back seat to acquisition arbitrage for most of GEM’s earlier years and given the scale of the business, there is significant scope for GEM to take advantage of these more operational factors. Industry conditions remain a headwind in the childcare sector. Affordability is getting stretched with an increasing percentage of parents hitting the childcare rebate cap earlier in the year. This factor, together with a cyclical increase in new centre supply over 2016 has resulted in a fall in occupancy levels for most industry participants over the past 18 months. However potential resolutions to both of these issues appear in sight. Low acquisition activity from the major childcare players has resulted in a fall in completion rates for proposed centre developments and this should ease supply concerns going into 2018. Most importantly, the next reset in affordability comes mid 2018 with the introduction of the Federal Government’s new childcare package which is expected to ease average net childcare costs and be a positive for GEM’s occupancy rates.