AFFINITY SHARES TAKE A MASSIVE THUMPING

Written on the 2 July 2015 by Nick Nichols

AFFINITY SHARES TAKE A MASSIVE THUMPING

GOLD Coast-based childcare centre operator Affinity Education Group (ASX:AFJ) has taken a massive thumping on the stock exchange this morning with its shares dropping as much as 40 per cent after a disappointing profit forecast.

The shares fell to a low of 49c before settling above 50c, or half their value when they were issued in a public float at the end of 2013.

Affinity says it is on track for pre-tax earnings of up to $32 million for the 2015 financial year, although there is no indication whether that will be enough to bring the company's bottom line into the black for the first time.

In an earnings and operations update issued to the ASX, Affinity says the second half of FY15 will produce earnings before interest, tax, depreciation and amortisation (EBITDA) of between $7.5 million and $8.5 million.

This will set the company up for EBITDA of between $27 million and $32 million for the full year.

However, Affinity has confirmed that a maiden dividend for FY15 should be expected by shareholders, at the rate of up to 60 per cent of net profit after tax.

"The trends in terms of the underlying business are positive coming into the second half, and I think the company is in a very strong capital position with a good balance sheet," says Affinity's managing director Justin Laboo.

"There are still plenty of opportunities for growth so from a company perspective, we will be concentrating on targeting improvement and delivering what was in the announcement today."

This optimism is not shared, with investors dumping their shares in morning trade.  More than five million shares changed hands in the first hour of trading.

"I don't get into the habit of commenting on share price but clearly there are a lot of different sentiments out there - some will be around the sector and some will be around ourselves - but from our point of view we still see the sector having strong underlying fundamentals," says Laboo.

"The business outlook for the year remains positive."

He says this will be driven by an increase in average occupancy, a scheduled 3 per cent fee increase and benefits from a new rostering technology which will take full effect in the current half year.

Affinity acquired 36 centres in the second half of FY15 and it has affirmed its intention to grow its portfolio by between 20 and 25 per cent a year.

Affinity Education has 161 childcare centres in its portfolio, accounting for 12,000 childcare places and 3600 staff.

While occupancy sits around 77 per cent, Laboo says this is up from 72 per cent in January. He reveals that occupancy increases slowed in the June quarter.

Affinity's shares have struggled in recent months, largely due to changes to childcare proposed by the federal government, particularly around staffing ratios.

Laboo says the government has affirmed its support for the childcare sector and he sees Affinity's centres as well placed to benefit from the proposed changes.

The government changes will offer more support for families with a combined income of between $100,000 and $160,000.

"It's the group's view that the government remains strongly committed to the childcare sector, with strong long-term fundamentals of increased participation in the workforce and the growing number of children in the early education market."


Author: Nick Nichols

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