The G8 Education Ltd (ASX: GEM) share price jumped 7% to $3.80 at the open this morning, as investors digested the news about further acquisitions and a possible expansion in China – falling profits notwithstanding. Here's what you need to know:
- Revenues rose 11% to $777 million
- Net profit after tax (NPAT) fell 9% to $80 million
- Underlying NPAT rose 7% to $93 million
- Earnings per share fell 3.1 cents to 21.2 cents per share (underlying: 24.7 cents)
- Dividends maintained at 6 cents per share (24 cents for full year)
- $200 million capital raising to significant shareholder completed
- Will pay down some debt and use proceeds to acquire more centres; expected to add 2 cents per share to earnings when completed
- Outlook for improving occupancy, further acquisitions, and development of additional revenue streams
So What?
Last year I wrote articles here and here after G8's weak interim results in August. I've unfortunately lost my original data, but today's results showed that G8's employee costs were steady at 55% of revenue, approximately equivalent to last year's.
Earnings Before Interest and Tax (EBIT) and underlying EBIT margins (a measure of centre profitability) of 20% were lower than last year, but on par with recent history. Occupancy was lower even than the first half of the year, which is concerning because the second half of the year is cyclically stronger for G8 due to Christmas holidays. This could suggest that fee increases are starting to bite, although management also noted that competition is increasing which is another likely explanation.
What does it all mean?
Simply, the above data means that G8 appears capable of keeping costs in check. Over the past 5 years its expenses as a percentage of revenue have either remained constant or fallen. For a service business, this is very important.
The rest of the update however, is not so rosy. Occupancy fell, and at 80% is at levels not seen since 2012. Management announced a sharp lift in capital expenditure on its centres, and has been rolling out other initiatives in order to promote its centres. The introduction of a Net Promoter Score allows changes over time to be potentially tracked, while a new app reportedly provides updates to parents of their children's progress throughout the day.
I'm optimistic that the company's initiatives will lead to improvements in the quality of its offering. However, with increasing competition, it's becoming apparent that G8 has not yet succeeded in differentiating itself from the rest of the market. I'm wary that debt, government fee subsidies, and the availability of centres for 4x EBIT (all factors outside the company's control) are largely what's driving G8's business forwards.
With high debt and the recent capital raising suggesting a return to acquisitions, I've cooled somewhat on G8's prospects, and I'm not excited about it at today's prices.
