Why the G8 Education Ltd share price is going nuts today

G8 Education Ltd (ASX:GEM) offers investors a high dividend yield.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares in child care centre aggregator and operator G8 Education Ltd (ASX: GEM) have soared 12% today after the group provided a better-than-expected trading update.

The Queensland-based group has reported that occupancy levels, as a key measure of overall profitability, are trending higher over the second half of calendar year 2018. According to G8's management "occupancy levels continue to show above trend seasonal improvement", with overall occupancy growth slightly ahead of management expectations.

Occupancy levels are important for child care centre operators as costs are relatively fixed in terms of staffing and rental overheads, which means the operators are reliant on sufficient paying customers all of the time to generate a profit. This is a similar concept to occupancy levels at hotels, where costs are also relatively fixed.

G8 Education's growth strategy has also largely been acquisitive in that it can consolidate the fragmented childcare industry across Australia, by rolling up centres under its own umbrella and saving on shared costs such as payroll, compliance, and training.

The model relies on a mixture of debt and equity raisings to fund the acquisitions, with the idea being that an arbitrage can be achieved by raising equity at a cheaper cost to that paid for the same asset.

This time last year investors were buying into the success of the business model with the shares at around $4.50 and the group paying out 24 cents per share each year in dividends.

However, shares came crashing down alongside forecast dividend payments in December 2017 after the group warned that the all important occupancy levels were falling due to oversupply of child centres and weak economic conditions outside Australia's east coat urban hubs.

The group is now forecasting earnings before interest and tax of around $136 million to $139 million in calendar year 2018, with ambitions to keep growing either by acquisitions or its own greenfield developments.

A junior roll-up rival in the sector is Think Childcare Ltd (ASX: TNK), which has seen its shares crumble around 34% over just the course of 2018.

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Gainers

Market up or down
Share Gainers

Here are the top 10 ASX 200 shares today

ASX investors had a rough end to the week...

Read more »

Man in an office celebrates at he crosses a finish line before his colleagues.
Share Gainers

4 ASX 200 shares racing ahead of the benchmark this week

ASX investors sent these four stocks soaring 12% to 18% this week. But why?

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
Share Gainers

Why BHP, Coronado Global, EBR Systems, and Whitehaven Coal shares are pushing higher today

These shares are ending the week on a positive note. Let's find out why.

Read more »

a young woman looks happily at her phone in one hand with a selection of shopping bags in her other hand.
BNPL shares

Up 87% since April, why the Zip share price can keep flying higher into 2026

A leading fund manager expects more outsized gains from Zip shares ahead.

Read more »

Person pretends to types on laptop drawn in sand.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a miserly session for investors today.

Read more »

Happy coal miner.
Share Gainers

Up 75% this week, why is this ASX All Ords stock rocketing again today?

Investors are piling into this ASX 300 stock on Wednesday. But why?

Read more »

A young woman smiles as she rides a zip line high above the trees.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a bountiful session for investors this hump day.

Read more »

Man looking happy and excited as he looks at his mobile phone.
Share Gainers

Why Coronado, DroneShield, Lovisa, and Mayne Pharma shares are racing higher today

These shares are having a good time on hump day. But why?

Read more »