Childcare centre operator G8 Education Ltd (ASX: GEM), best known for its whopping 6%+ dividend, released its half-yearly results to the market today. They were mixed, with higher costs impacting on profits, while a greater number of shares on issue hurt earnings per share.
Here's what you need to know:
- Revenues rose 18% to $360 million
- Statutory Net Profit After Tax ("NPAT") fell 12% to $25 million as a result of additional borrowing costs due to early debt repayment
- Underlying NPAT rose 2% to $32 million
- Underlying Earnings Per Share fell 3% to 8.53 cents due to new share issues
- 9 new centres acquired, total of 478 in Australia and 20 in Singapore
- Further 12 purchases expected in second half, funded from earnings
- Dividends maintained at 6 cents per share
- Total borrowings of $396 million due in 2019, cash of $40 million
So What?
Last week I wrote that there were several key things investors should watch in G8's upcoming report. I couldn't find occupancy figures, perhaps the most critical of these, in today's update. This was annoying because a significant chunk of the group's increased expenses were due to (regulated) higher staff to children ratios and it would have been useful to contrast this with occupancy.
Operating cash flows were acceptable, but they did decline to 21% of revenue (24% in the prior half) due to higher costs. Notably the company spent $30 million on dividends which is quite a high portion of its $33 million cash flow from operations. This was due to the timing of dividends, with three payments made in the half year, and should even out over the full year.
By my calculations, shares on issue rose 1% to 378 million following the issue of 4 million new shares during the half year – mostly due to the dividend reinvestment plan.
The accompanying results presentation also saw some concerning metrics with regards to G8's 'Like for Like' (same centre) Earnings Before Interest and Tax (EBIT). Centres acquired before 2013 have been able to deliver on average an ~8% or more improvement in EBIT per annum in recent years. Centres acquired in 2014 and 2015 delivered just 1% in EBIT growth in the half year. This was concerning because these centres account for more than half of the group's EBIT.
Now What?
The market has abandoned G8 en masse, with shares down 23% at the time of writing. In my opinion a gross overreaction, there's no doubt that a number of things in today's report were highly concerning. For a company growing predominantly by acquisition, cost control is key and the increase in expenses hit hard – as well as giving life to some investors' fears over regulatory input, given the regulated increase in staff to child ratios.
There is a case for optimism, with G8 noting that wage expenses improved in the second quarter and that further improvements are expected in the second half. Revenues rose 8% in the second quarter, presumably as the result of fee increases to cover increased staff numbers. The number of centres numbers only rose by ~2%.
The elephant in the room
The lack of occupancy figures is frustrating and potentially a cause of today's share price movements. When G8 publishes the number of places it has available but doesn't mention the number of places that are utilised, it's tough to evaluate what increased wage expenses and fee increases really mean.
Will more staff and more staff development opportunities (G8 is also spending more on training) result in a higher standard of care and make G8's centres more attractive to parents? Or will higher fees have an ugly follow-through impact on occupancy by scaring parents away?
These are tough questions to answer and I wasn't surprised to see shares dive this morning. Perhaps the only takeaway from today is that the dividend remains sustainable, and the group's balance sheet has improved compared to the past year. Despite my recent optimism for the stock, after today's results revealed a lack of growth I'd be inclined to consider the results, before buying more. I continue to hold my shares.
