Australia | Nov 20 2018
This story features G8 EDUCATION LIMITED. For more info SHARE ANALYSIS: GEM
Brokers are looking forward to a better performance from G8 Education in 2019 as occupancy levels stabilise and supply pressures ease.
-Market moves closer to equilibrium
-Risk of further downside greatly diminished
-Self-help initiatives gaining traction
By Eva Brocklehurst
The government Child Care Subsidy (CCS) has had a positive impact on demand for G8 Education ((GEM)), resulting in improved occupancy, and brokers believe the outlook for 2019 enrolments is now much better.
The company expects to deliver operating earnings (EBIT) of $136-139m in 2018, versus the $141.5m forecast at the August result. Yet, brokers are now looking beyond this for evidence that improvements to the operations are gaining traction. The most pleasing aspect of the trading update, Canaccord Genuity asserts, is the trend in occupancy in September and October that points to the CCS having a positive influence on demand.
The revised guidance, which implies a -2-4% downgrade to prior expectations, was driven by the Oxanda centres, that were acquired in 2017. Still, that business has been re-branded and, as a result, the issues are now considered behind the company while the outlook has improved considerably. Canaccord Genuity, not one of the eight monitored daily on the FNArena database, retains a Buy rating and $2.90 target.
The stock may have rallied of its lows and, hence, the discount has been removed but Deutsche Bank remains unconvinced that the industry dynamics/structure have changed enough to become more positive, maintaining a Hold rating.
With a similar view, Moelis downgrades to Hold from Buy, with a $3.12 target, noting the market appears to have moved closer towards equilibrium. Market conditions and strategic initiatives have supported a modest increase in the broker's earnings estimates. While supportive of the business strategy, the broker, also not one of the eight, deems a downgrade prudent, given supply risks leading up to the January re-enrolments.
Morgan Stanley, on the other hand, is convinced the company has turned the corner and trading multiples should expand. The broker upgrades to Overweight from Equal-weight. The main concerns stem from M&A, as those centres operating with scale have now stabilised occupancy levels and, therefore, acquisition multiples are subdued.
Moreover, G8 Education lags its peers in terms of its ability to participate in consolidation. Gearing is now expected to peak mid 2019 but the broker does not envisage a material risk of additional capital being required, although this in turn limits the scope for M&A.
Macquarie upgrades to Outperform from Neutral as the risks to the balance sheet have eased with debt having being refinanced. The broker believes the opportunity for a further re-rating exists, particularly in the context of broader equity market conditions.
Occupancy in the second half showed seasonal improvement above the trend. Growth over the recent months has been driven by operating initiatives and the CCS. Occupancy is now the same level versus 2017 on a like-for-like basis. Re-enrolments also appear to be trending positively, Canaccord Genuity suggests, consistent with industry feedback.
As there are no industry regulatory changes on the horizon a number of the recent risks have eased. Morgan Stanley agrees higher occupancy now mean higher earnings and the risk of further downside is greatly diminished. The broker expects further improvements in 2019 amid moderating supply.
The lagged effect of new supply is the main risk for enrolments in 2019, Macquarie suspects, although management still anticipates earnings growth in 2019 will be underpinned by the incremental contribution from greenfield additions, plus better centre management retention.
Quality initiatives are also likely to feature, as a number of centres have been refurbished in the year to date and those of higher quality are less susceptible to competing supply. Macquarie calculates 22% of the centres are still at risk.
UBS agrees self-help initiatives are starting to gain traction. This should more than offset the subdued operating environment. Wage pressures also appear to have stabilised and the positives now outweigh the risks.
Pricing increases have been stronger than expected and, while supply remains an issue, it has not caused further deterioration. Funding costs are expected to reduce and the roll-out strategy appears fully funded. The valuation looks appealing to UBS and a 5.5% price increase is incorporated in the second half of 2018.
There are four Buy ratings on the database and one Hold (Deutsche Bank). The consensus target is $3.05, signalling 8.1% upside to the last share price the dividend yield on 2018 and 2019 forecasts is 5.8% and 5.2% respectively.
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