G8 SHARES STILL TENDER AFTER WILD RIDE
Written on the 17 August 2016 by Nick Nichols
SHARES in Australia's largest listed childcare centre operator G8 Education (ASX:GEM) edged lower today after briefly recovering from a $400 million rollercoaster ride in the wake of a disappointing profit result yesterday.
The stock dipped as much as 6 per cent in morning trade, but it was a far cry from the 30 per cent thumping given by investors yesterday after G8 posted a 12 per cent fall in net profit for the six months to the end of June.
The profit result, driven by higher costs due to new government regulations regarding staff ratios at childcare centres, put the wind up shareholders who wiped as much as $400 million off the company's value.
The fall temporarily knocked out G8 as the Gold Coast's biggest listed company with its market value falling under $1 billion for the first time in four years.
The shares fell more than $1 to a low of $2.62 yesterday, before ending the day at $3.23, clawing G8's market capitalisation back to $1.2 billion.
The company's $24.87 million interim profit was impacted by higher wage expenses and one-off finance costs which offset an 18 per cent lift in revenue to $357.95 million.
However, the underlying net profit was up 1.6 per cent to $32 million, with G8 traditionally posting stronger results in the December half-year.
G8's shares have been under pressure for the past two months after trading above $4 in June.
The major causes for concern have been changes to government regulations around staff ratios at childcare centres and whether higher costs would impact demand for childcare services.
G8, which reports full-year earnings across the calendar year, confirmed fears that costs were having an impact. However, the latest profit results do not reveal centre occupancy rates as the company has done in recent years.
Support office costs rose $1.4 million in the June half-year, with half of that attributed to new executive and board appointments.
Wage costs also were up 10 per cent, driven by increased staff ratios and rises in award wages for childcare workers.
Head office costs per licensed place were $440, up from $439 a year earlier, indicating a slowdown in the company's capacity to reduce costs.
Despite the headline result, G8 added nine new centres to its portfolio during the period, with the latest result buoyed by 23 new centres bought in the second half of calendar 2015.
G8 operates 478 centres in Australia and 20 in Singapore, giving it 37,045 licensed childcare places.
The group plans to settle another 12 childcare centres in the current half year for $32 million, with the acquisition to be funded through cashflows.
G8's portfolio growth has slowed over the past two years, but the company says it has instead concentrated on refurbishing existing centres. It also has invested in staff training which it says will yield 'top line' and 'cost line' benefits in the future.
"The momentum established across the group in the second quarter is encouraging and lays a solid foundation as we enter the seasonally stronger second-half period," says G8 managing director Chris Scott.
During the period, G8 also refinanced about $260 million in Singapore-dollar denominated corporate notes, extending maturity from May 2017 to May 2019.
This led to a $10 million hit to the company's bottom line. Overall, borrowings have fallen about $110 million.
Underlying earnings before interest and tax rose 8.5 per cent to $57.4 million.
However, underlying earnings per share fell from 8.75c to 8.53c due to the expansion of the company's capital base following a $270 million capital raising in May.
G8's shares last traded at $3.15.
Find G8 Education on the Gold Coast Top Companies List for 2016
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Author: Nick Nichols