G8 PROFIT GIVES AFFINITY INVESTORS MORE TO CONSIDER

Written on the 10 August 2015

G8 PROFIT GIVES AFFINITY INVESTORS MORE TO CONSIDER

G8 Education (ASX:GEM) has given shareholders in Affinity Education (ASX:AFJ) more to think about after delivering a 73 per cent boost to half-year earnings.

The childcare centre operator, which has made an 80c-a-share takeover offer for the embattled Affinity, posted a $28.2 million net profit for the six months to the end of June.

Affinity shareholders can take the cash offer, which is 20c below the shares' issue price, or chose to swap their shares for G8 stock at the rate of 4.25 shares for one.

The swap would give Affinity's stockholders their first dividend, which now stands at 24c per G8 share for the full year, paid quarterly.

G8's latest profit result caps off a significant run of acquisitions in the second half of 2014, which helped revenue jump 66 per cent to $310.9 million for the six months to June 30.

"The result for the 2015 half-year was excellent and reflects both strong like-for-like organic growth in G8 Education's existing early learning centres and the positive contribution and integration of the recent centre acquisitions," says G8 managing director Chris Scott.

G8 added 21 centres to its portfolio during the June half. This comes on top of 88 centres bought in the second half of 2014, which helped buoy the latest result. A further 17 centres have been contracted and are yet to settle.

According to Scott, G8 continues to focus on "disciplined consolidation in high-demand areas". He says G8 is not straying from its targeted strategy of buying childcare centres at four times EBIT (earnings before interest and tax).

"If you pay six times EBIT you will die," says Scott.

"You also need to make sure that EBIT is sustainable. When we buy we look at a number of factors, including demand or even whether the council is going to run a road through the centre. You want to make sure EBIT is sustainable."

Scott says G8 remains confident it can grow its business further on that basis, although he concedes there is no rush.

"A lot of these centres are owned by mums and dads, and not companies, so you have to be patient."

G8, which argues in its bidder's statement that it can add value to the Affinity portfolio, has affirmed that head office costs have fallen to $447 per childcare place.

Revenue growth within the company's existing centres was 5.6 per cent, while wages were up just 1.9 per cent.

Scott says gains are being achieved through the use of technology to micromanage the business.

G8 currently owns 457 centres in Australia and 18 in Singapore. Once the 17 outstanding purchase contracts have been settled, it will control 35,125 childcare places in Australia.

 


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