G8 Education Ltd (ASX: GEM) shares crashed 5% lower yesterday as the childcare provider reported lower profits.
In its full year 2019 results, G8 Education reported profits down 3.9% due to investments in its greenfield portfolio.
G8 Education results
G8 Education reported revenue of $920.1 million for FY19, a 7.2% increase on 2018's $858.2 million. The increase in revenue was attributable to increased occupancy, acquisition performance and fee growth. Occupancy improved in all states except South Australia, reflecting a positive response to investments made to improve quality across the offering and improved affordability from the child care subsidy.
Underlying earnings before interest and tax (EBIT) of $132.5 million was reported, in line with November guidance, but down 2.8% on the previous year. Like-for-like occupancy growth contributed to $10.9 million like-for-like earnings before interest and tax (EBIT) growth. Underlying EBIT was impacted by investments in quality as well as the ramp-up of the greenfield portfolio.
CEO and Managing Director Gary Carroll said, "we are already seeing the benefit of these investments, both of which are expected to generate significant earnings growth in future years."
Underlying net profit after tax (NPAT) declined 3.9% to $76.4 million from $79.5 million in 2018, with underlying earnings per share of 16.7 cents, down 4.5% from 17.5 cents. A fully franked dividend of 6 cents per share was declared, representing a full year payout of 70% of lease adjusted NPAT.
In 2019, G8 Education completed the divestment of 25 centres in Western Australia, resulting in improvements in occupancy and portfolio quality. A further 16 centres were closed up on lease expiry during the year.
Balance sheet
G8 Education successfully completed a balance sheet restructure during 2019 providing flexibility with comfortable covenant headroom. SGD$270 million in bonds were repaid, funded by new syndicated debt facilities. The new facilities provide an increased loan tenor at a lower average cost. Strong cash flow generation continued with underlying lease adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to cash conversion of 107%.
Outlook
There has been significant instability in the market to date this year due to events including the bushfires and coronavirus. This has flowed through to occupancy levels with year-to-date occupancy slightly behind 2019. G8 Education has advised that the impact on profits has been, and will continue to be, mitigated by cost management. It advised, however, that it is too early to make an assessment of the group's underlying occupancy performance.
The group is focused on accelerating EBIT growth by driving growth in turnaround and green fields opportunities. A full-time team is in place focused on turnaround opportunities. This acceleration program was launched following a successful pilot program, which resulted in occupancy growth ahead of the rest of the network.
