Childcare operator takes a hit

in childcare industry giant G8 Education plunged yesterday after the company warned “unprecedented” market conditions – including an oversupply of centres – were likely to affect earnings until at least mid next year.

The Gold Coast’s largest listed company announced a half-year profit of $23.7 million – down 22.1 per cent on the previous period.

Investors punished the stock, driving the share price 16.5 per cent, or 40c, lower to close at $2.02 wiping $184 million off its market capitalisation.

Dividends payouts were limited to 4.5 cents per share. That is despite G8 this time last year telling investors it was targeting a dividend of 10cps.

G8, which has a number of brands including Headstart Early Learning Centres and Pelican Childcare, said its underlying net profit – which strips out one-off items – fell 23.9 per cent to $25.6 million, while its underlying pre-tax earnings dropped 21.2 per cent to $48.1 million.

However, revenue was up 7.6 per cent to $396.4 million, due to fee increases, acquisitions and the opening of new centres. Earnings per share were down 32 per cent to 5.68c per share.

G8 blamed growing wage costs – largely due to the government mandating higher staff to student ratios – for the earnings slump.

For the first six months of

the year the wages bill grew $10.6 million compared to the previous period to $192.7 million.

Fee increases were offset by declining occupancy, which fell 2.5 per cent to 70.1 per cent, costing the company $11.9 million in lost revenue.

However, G8 said wages ratios had returned to prior-year levels by May, “setting up an improved wage outcome in the second half”.

It also said early signs regarding occupancy in the second half were positive, with levels increasing 2.2 per cent to 74.5 per cent in June.

The company is also forecasting a 50 per cent drop in the number of development applications being filed for new centres and new centre openings in the second half of the year.

However, it does not expect market conditions to improve until the middle of next year.

“While occupancy growth in July and August is encouraging and demand is forecast to improve as a result of the new childcare subsidy, the combination of supply conditions and regulatory change is unprecedented,” G8 said.

“Notwithstanding continued improvement in quality and capability, we are not forecasting a material improvement in market conditions until mid to late 2019 and are adopting a conservative approach in relation to occupancy growth forecasts for the second half.”

The company also said that a new federal rebate system, just brought in, would stimulate demand long-term. G8 had jacked up fees by 5.5 per cent from July, which is above analyst expectations of a 3 per cent to 4 per cent rise.

Wages in the meantime lifted 3.5 per cent, G8 said.

The company outlined that profits would increase in the second half, but implied that raw earnings (before interest and tax) would be $141.5 million for the full year. That was 8 per cent below what the market was expecting, UBS analysts said.

The outlook for the second half was “much worse than expected”, UBS said.

Higher costs and lower contributions from centres were the key difference to G8 missing market expectations, the analysts said.

On the bright side was that G8 confirmed it had obtained new financing arrangements for banks for $400 million – it had $270 million in bonds due to be repaid by May next year.

This refinancing was “a big de-risking event”, UBS analysts said.

G8 has 512 childcare centres in Australia, however the market remains highly fragmented.