Australia's Dual-Income Boom And Urban Growth Will Drive Demand

Key Takeaways

• Cost discipline, digitalisation, and sector consolidation could materially expand margins and market share, positioning G8 Education for sustained earnings growth.
  
• Structural industry drivers make G8 Education resilient, with increasing occupancy, pricing power, and recurring revenue supporting long-term outperformance.
  
• Declining occupancy, labor pressures, affordability issues, regulatory costs, and exhausted cost-saving measures are creating significant headwinds for earnings and revenue growth.

Catalysts

Provides early childhood education and care services in Australia.

• Analyst consensus expects cost management and procurement initiatives to yield modest margin improvements, but with further digitalisation, centralised procurement, and declining agency reliance, there is significant headroom for a structural step-change in net margins well beyond current market forecasts.
  
• Analysts broadly agree that government investment and fee inflation will boost revenue, but with accelerating population growth in metropolitan and regional areas, coupled with rising female workforce participation and removal of the activity test from 2026, occupancy uplift could drive outperformance on the top line and deliver compound revenue gains.
  
• G8 Education's sector-leading quality ratings and educator development pipeline position it uniquely to consolidate market share through differentiated premium offerings, enabling both price premium and higher sustained occupancy, which should lead to durable EBITDA and earnings growth.
  
• The fragmented childcare sector is ripe for consolidation, and with a strong balance sheet and conservative gearing, G8 can significantly accelerate strategic acquisitions and greenfield rollouts, unlocking substantial top-line and scale-driven margin expansion over the medium term.
  
• Growing parental focus on early childhood outcomes and ongoing increases in government subsidy generosity will entrench formal childcare as an essential, non-discretionary service, providing G8 Education with highly resilient and recurring revenue streams, even through economic downturns.

G8 Education Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on G8 Education compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming G8 Education's revenue will grow by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.0% today to 8.5% in 3 years time.
• The bullish analysts expect earnings to reach A$97.0 million (and earnings per share of A$0.13) by about August 2028, up from A$70.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the AU Consumer Services industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 3.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

G8 Education Future Earnings Per Share Growth

Risks

• Occupancy rates have continued to decline, with current levels at 64.5% for the half (3.7% down year-on-year) and spot occupancy 5.9 percentage points below the prior comparative period, signaling persistent demand weakness and constraining revenue growth.
  
• Ongoing labor market pressures, including regulatory-driven wage increases and the difficulty of attracting and retaining qualified staff, are likely to cause sustained margin compression over time, impacting G8's ability to grow net margins and earnings.
  
• Persistent cost of living pressures and limited childcare subsidy relief are resulting in affordability challenges for families, which in turn leads to reduced child enrollment and days in care, weighing on overall group revenue.
  
• Increased regulatory scrutiny and the aftermath of high-profile incidents such as the situation in Victoria risk driving up compliance and implementation costs, as well as capital expenditure requirements-such as the group-wide CCTV rollout-which could negatively affect net income and free cash flow over multiple years.
  
• The company's ability to continue leveraging cost controls as an earnings lever is reaching its limits, as procurement and support office cost savings are now largely embedded, leaving future earnings more directly exposed to soft occupancy and industry headwinds.

Valuation

• The assumed bullish price target for G8 Education is A$1.7, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of G8 Education's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.7, and the most bearish reporting a price target of just A$0.9.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$97.0 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of A$0.84, the bullish analyst price target of A$1.7 is 50.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.