21 May 2015, Written by Nick Nichols


RISING debt and risk were high on the minds of G8 Education (ASX:GEM) shareholders at this year's annual general meeting, forcing chairman Jenny Hutson (pictured) to fend off comparisons with Eddy Groves' collapsed childcare empire ABC Learning Centres.

In an odd twist, one shareholder even questioned the surge in dividend payments in recent years in what was a highly inquisitive session attended by about 40 shareholders at the Southport Yacht Club.

"Certainly we are in the childcare and education sector, but there's a lot that's different about us than about ABC," Hutson told the shareholders.

"To put it simply, we buy existing good centres with great people and work on those centres to make them great centres, whereas our friends at ABC - a long time ago and before us - had a completely different model to that.

"They built new centres, they were developers in the childcare centre (sector), they had targets - we don't have targets. We do the right business at the right time when it's available. We don't set targets; we just assess what's right.

"We're not at all like ABC we're only in the same sector they happened to be in and we've had to address a lot of the issues that were left over from their demise in terms of the sector itself. We are very careful, we're very cautious, we're very prudent and we think that's reflected in our operations at every level."

After the meeting, Hutson told Gold Coast Business News she understood the continued comparison with ABC Learning, which spectacularly imploded despite public perceptions that it was operating in a safe business sector.

"We think we've played a big part in reinstating people's confidence in a corporate sense," Hutson says, adding that there are "lots of financiers in the room today that have come to know us".

At the end of December last year, G8 Education had no bank debt but gross corporate debt of $353 million and net corporate debt of $233 million at an average interest rate of 5.1 per cent. Most of that debt has been secured in Singapore, where Hutson says the company could find a lucrative source of capital funding to pay it out on maturity.

Hutson says the debt compares to a market capitalisation of $1.5 billion and annual revenue of $491 million.

"There were comments (in the meeting) about debt, but we look at ratios rather than numbers," she says. "It's still conservative and we will keep it conservative. We have internal guidelines around ratios that we think are right. It's a really strong cashflow business and we are really comfortable about that moving forward."

As for rising dividends, Hutson says this will continue as profits increase.

"We've had a big step change in our business over the period, and a positive step change in terms of the size and magnitude. We think we've remained true to our conservative parameters.

"We exist at a corporate level for shareholders and repatriating profit. We have careful metrics that run around our dividend policy which we are firm about.

"While (debt levels) might seem to be large numbers they are large numbers in the context of a big business. We look very carefully as a board at the balance between debt and equity and getting that right, and dividends are a very important part of that."

G8 Education's shares have been under pressure this year amid ongoing concerns over its ability to continue finding acquisitions that meet its criteria, and also due to uncertainty surrounding the federal government's policy on childcare.

Hutson says the government's plans are broadly positive for the sector and for G8, although she concedes that as for the "exact consequences, we all have to wait and see".

"What we are seeing is a societal change that's valuing childcare and we are well positioned to deliver on that."

As for growing competition for acquisitions, Hutson says fellow Gold Coast competitor Affinity Education Group (ASX:AFJ) runs its own race and G8 does not "see much of them in terms of our acquisitions". She says there are about 4000 childcare centre operators across Australia that are within G8's target market.

G8 still applies s formula of four times EBITDA for acquisitions, although the company has been relatively quiet in the past six months after bedding down 203 new centres in calendar 2014.

The company currently has 455 childcare centres, or 9 per cent of the market by revenue, still behind the not-for-profit Goodstart Early Learning at 12 per cent.

When G8 released its 2014 annual results in February, it announced the acquisition of another 12 childcare centres. Hutson says those acquisitions are on track to settle before the end of June.

G8 posted a net profit of $52.7 million for the 12 months to the end of December 2014, up 70 per cent on a year earlier.

Author: Nick Nichols





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