Small Caps | May 29 2019
Brokers expect strong growth in returns from Think Childcare over the next few years.
-Investment in education, technology and site selection delivering favourable outlook
-Softer occupancy rates in first half affected by Easter/Anzac Day
-Nido roll-out expected to improve the quality of centres
By Eva Brocklehurst
Think Childcare ((TNK)) is moving to a higher-quality offering and has reaffirmed guidance. Limited commentary was provided on supply in the trading update but operating improvements, Wilsons suggests, reinforce the view that early investment in education, technology and site selection is having a favourable impact.
Moelis is also positive about the outlook for Think Childcare, expecting strong growth in margins and returns over the next three years as the centre network expands and allows supplier support costs to be shared.
The company is on track to complete 10 acquisitions and undertake two greenfield projects in 2019. Moelis has a Buy rating and $2.34 target and suggests thecompany's unique acquisition model provides the opportunity for compounding capital at high rates of return, at around 20%, without start-up operating risk.
2019 operating earnings (EBITDA) guidance was reaffirmed at $13.8-14.8m. Overall, Moelis reduces 2019 estimates by -5%, to reflect higher support costs versus expectations. However, this is seen being offset by the contribution from 2018 acquisitions as well as greenfield projects.
Wilsons believes the higher cost profile will abate as the centre acquisitions ramp up. The broker applies G8 Education's ((GEM)) five-year historical average multiples to add "vigour" to its valuation, arriving at a $1.95/share target/valuation, which is up 8.3% and reflects a 2020 enterprise value/operating earnings ratio of 7.2 x, -16.3% below G8 Education.
Think Childcare is well-placed, given the increase in demand for childcare services and easing supply growth that is expected in the second half of the year, Canaccord Genuity assesses, marginally increasing occupancy rates and fee assumptions for 2019.
The broker acknowledges the occupancy statement was softer than anticipated at first glance but forward assumptions appear bullish. As Easter and Anzac Day in 2019 were close together, an entire week was affected in terms of occupancy, which means the flat rate is slightly better than it appears. The company assumes occupancy over 2019 will increase by 3%. Canaccord Genuity maintains a Buy rating and $2.11 target.
Wilsons points to feedback which suggests closures are continuing, although this appears to represent just 1% of centres. Data from the Australian Department of Education and Training indicated a 0.3% increase in demand year-on-year in the September quarter of 2018. Wilsons maintains its Buy rating.
Moelis believes the company can deliver strong earnings growth and also undergo a step change in quality with the roll-out of Nido. Full integration is expected in 2020. The Nido brand is a higher quality service which has lower licensed places, average fees and historically generates better occupancy levels. This ensures a superior margin and earnings.
In the transition process so far, all centres have moved to the education curriculum, while there remains some training and practices to be implemented. Around 50% of centres have had the service model implemented. Capital improvements are ongoing and 14 sites have been identified as priorities for improvement. Two centres that were deemed incompatible with the Nido model have been closed.
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