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G8 Education Ltd GEM

Rating as of

Morningstar’s Analysis

Valuation
Currency in AUD
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1-Star Price

PREMIUM

5-Star Price

PREMIUM

Economic Moat

PREMIUM

Capital Allocation

PREMIUM

G8 Education Reports Improvements but It’s Not Out of the Woods Yet

Analyst Note

| Gareth James, CFA |

We maintain our fair value estimate for no-moat G8 education of AUD 2.00 per share after a better-than-expected 2021 trading update. G8 reported an unaudited EBIT adjusted for lease expenses in the 11 months ending Nov. 30, 2021 of AUD 76 million versus our previous forecast of AUD 69 for the full-year 2021. NPAT was AUD 43 million for the 11 months ending Nov. 30, 2021 versus our previous forecast of AUD 41 million for the full year. We estimate the month of December usually contributes between 5% and 10% of annual EBIT and we have increased our full-year 2021 EBIT after lease expenses forecast by 19% to AUD 82 and our NPAT by 13% to AUD 46 million from our prior forecasts. The company’s main strategic initiative, an improvement program to enhance centre quality, is largely responsible for the solid earnings as it has resulted in better occupancy rates in the improved centres. But the childcare sector continues to be affected by COVID-19 headwinds subduing occupancy rates, forcing temporary centre closures, and creating difficulties in maintaining and attracting staff. Despite the positive news, G8’s share price remained virtually unchanged following the business update, trading at AUD 1.10. We continue to believe G8 is materially undervalued.

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Company Profile

Business Description

G8 Education operates a portfolio of around 480 childcare centres in Australia, implying a market share of around 8%. The company is highly dependent on government subsidies, which comprise around 60% of childcare fees, but we expect subsidies to continue growing with childcare demand. G8 does not own the buildings from which its childcare centres operate, and labour costs comprise around 60% of expenses, with rental costs comprising around 15%.

Contact
159 Varsity Parade
Varsity Lakes, QLD, 4227, Australia
T +61 755815300
Sector Consumer Defensive
Industry Education & Training Services
Most Recent Earnings
Fiscal Year End Dec 31, 2020
Stock Type
Employees 9,588