Childcare subsidies great for G8 Education

The rebates also were manna from above for Eddy Groves’s ABC Learning, fuelling the group’s acquisitive growth before its debt-inspired implosion.

Now the Gillard government is mulling a plan to subsidise childcare workers’ pay to the tune of $1.4 billion. We await Canberra also topping up the stipends of lowly paid cleaners, dish pigs and journalists, but we’re not holding our breath.

As the only listed childcare provider, G8 is a logical beneficiary, although it’s far too early to gauge any effect. Because the industry is fragmented and highly competitive, the savings are likely to be passed on to the customer.

Still, it won’t do any harm in terms of fostering affordability and increasing demand.

G8 chief operating officer Chris Sacre says wages typically account for 70 per cent of a centre’s operating costs, but in G8′s case it’s more like 60 per cent. Then again, given G8 doesn’t have a unionised workforce under an enterprise agreement, it could well miss out.

This week G8 continued its acquisitive push by acquiring seven more centres in NSW for $9.2 million, taking its total outlets to 150. G8 is the second-biggest operator with a 2.5 per cent share, behind the Good Start charity, which bought most of the ABC centres, with 11 per cent penetration.

After a shaky start G8, based on the stricken Early Learning Services, has taken more than baby steps to proving its credibility.

The ABC fiasco still casts a pall over the sector while G8′s management – the rump of the old schoolies’ accommodation specialist S8 – bears that north-of-the-Tweed guilt by association.

Unlike ABC, G8 doesn’t own freehold property and has been disciplined in its acquisitions. The latest seven properties were bought on an earnings before interest and taxes multiple of four times, while ABC thought nothing of paying high single-digit multiples.

Some investors are chary about the sector because most of the centres are owned by not-for-profit groups that don’t have shareholders to worry about. But in many cases the centres subsidise the unprofitable parts of the charity and an average outlet should be able to turn a quid on a stand-alone basis.

There’s little doubt G8 is in the right sector: the nation’s birthrate, migration and female workforce participation levels have increased, while high property costs means fewer centres are being built and there’s a supply shortage in some areas.

Sacre says that, unlike earlier equity-funded acquisitions, further purchases will be paid for via a recently negotiated $50m debt facility and G8′s $12m cash balance. G8′s June-half earnings vaulted 81 per cent to $6.78m. Analyst consensus points to full-year earnings per share of 9.5c this year and 11.3c in calendar 2013.

With the ABC sores festering, Criterion rated G8 an avoid at 68c in May last year (and indeed the stock fell to 50c). Now that G8 has a track record, we upgrade to long-term buy.