As covered by myself and other contributors, shares in G8 Education Ltd (ASX: GEM) have been sold down heavily in recent weeks after a combination of a delayed settlement for a recent acquisition and fears of government legislation impacting profits.
(You can read contributor Andrew Mudie's coverage of the 'Buy' case for G8 Education here)
Little has come of investor fears so far, although I believe a non-market-sensitive announcement released by the company this morning may provide some substance to recent rumours.
As the second tranche of National Quality Framework changes for child care businesses (governing staff to children ratios among other things) come into effect in January 2016, G8 Education is expected to experience a 2.8%-3.2% increase in costs from January onwards.
This equates to an extra $2-$2.20 per child per day, although the precise figure varies depending on occupancy levels of its various centres.
G8 shares fell as much as 7% this morning after the announcements were released.
However management is still waiting on the release of the federal government's family care package – which some expect to cause further heartache – in the near future before making a decision on any changes in policy that may be required by new legislation.
Any changes are equally likely to impact G8's competitor Affinity Education Group Ltd (ASX: AFJ), which has also experienced a ~40% decline in its share prices in recent months.
Despite potential changes to the childcare system I believe that Affinity and G8 Education continue to look like good buying opportunities, not least because of their comparatively cheap price to earnings (P/E) equations and ability to grow by acquisition relatively cheaply.
It would take really major changes to actually have a 40% impact on Affinity and G8's bottom line, and instead I believe that the recent repricing reflects fears that growth will be substantially slower in the future.
With G8 trading on a P/E of 19 (yielding 6.1% fully franked), and Affinity trading on a P/E of 13 (no dividend), both companies look appealing and I recently bought into G8 at $3.71.
In the meantime, if you're in the red on G8 or Affinity, you've got a golden opportunity to practice your investing patience on a small scale – before the next market upset tests it on a big one.
