@Islay,
Thanks for sticking to the facts and for raising a number of relevant points.
Yes, a 3.4% drop in average occupancy is a challenge for the childcare industry as a whole, but who is suffering the most?
One aspect of the recent G8 announcements that doesn’t seem to have attracted much attention so far (here on HC, at least) is that the Company have guided a 175m$ EBIT for FY2017, of which 171m$ from centres acquired before 2017. That is a 5% year-over-year
organic EBIT growth, which is quite remarkable in an environment of dropping occupancy rates.
As you mentioned, seasonality points to an improving occupancy picture for the remainder of the year, and in FY2018 we will finally find out what the net impact of the new Package is. As I have argued before, improved average childcare affordability should logically translate into improved average occupancy; yes, some families will be worse off, but as long as they are a minority the net effect should be positive. The tone struck by G8 in their announcement seems to be in agreement with my view.
Also, let’s not forget that the fee increase caps are on the government subsidy amounts, not on the fee itself; therefore, the price charged to users will ultimately continue to be determined by market forces.
Going back to my original question, who is suffering the most? Not G8 for now, it would appear. I keep hearing about increased competition and oversupply; fair enough, both are negative for pricing power, but are G8’s corporate competitors doing any better? In a competitive environment, one wants to back the player with the highest margins / lowest costs, and until proved otherwise that is still G8.
Looking at valuation, after this share placement and earnings guidance my modelling gives me an EV/EBIT of 9.65x for FY2017 and 8.15x for FY2019. At the placement price of 3.20$, FY2019 EV/EBIT is actually 7.75x, which, at a 30% tax rate, gives an after-tax FCF buyout yield of 9%. I think the participants in this placement have struck a very good deal for themselves (which is kind of annoying from an existing shareholder’s perspective, I must say).
Let’s be clear, I did not like at all the sequence of events that has preceded and led to this placement, and I think it is fair to say that G8 have been at best naïve in the way they have dealt with it all (which is not really acceptable for a listed company of their size). That said, dilution has been minimal and the business case appears to be still intact. Therefore, I am prepared to give them the benefit of doubt for this time and have added to my holdings accordingly.
IMHO, DYOR & GLTAH
(20min delay)