Weak Enrollment And High Costs Will Impede Operations Yet Confirm Value

Key Takeaways

• Ongoing cost pressures and declining birth rates are constraining enrollment and revenue growth, despite positive government policy trends for early childhood education.
  
• Heavy reliance on cost-control and efficiency limits future earnings growth, while regulatory risks and localized competition could further compress margins.
  
• Persistent weak demand, rising costs, and limited capacity for further savings threaten future profitability amid challenging macroeconomic, regulatory, and demographic conditions.

Catalysts

Provides early childhood education and care services in Australia.

• While shifts in government policy, such as the planned removal of the activity test in 2026, should theoretically support demand for early childhood education and increase enrollment opportunities for G8, ongoing cost of living pressures continue to strain family affordability, restricting occupancy rates and limiting the company's ability to drive top-line revenue growth in the near term.
  
• Despite expectations of stabilizing or rising birth rates which could support longer-term demand for childcare services, recent declines in the younger age cohorts-attributed to lower birth rates post-COVID-have put further near-term pressure on enrollment volumes, potentially resulting in continued revenue headwinds as these cohorts progress through the system.
  
• Although G8 Education's ongoing investment in quality improvement, cultural alignment, staff retention, and center optimization has driven gains in net operating margins, the company's moderate occupancy and persistent dependency on cost-control measures to sustain earnings growth highlight an over-reliance on efficiency levers that may be close to fully exhausted, which could cap future EBIT and NPAT upside as revenue stagnates.
  
• While government backing for early childhood education remains a structural positive that enhances sector stability, there is a risk that shifting fiscal priorities or increased regulatory scrutiny-especially in the wake of high-profile incidents-may lead to tighter compliance regimes and higher direct and indirect costs, thus compressing operating margins and limiting upside to future earnings.
  
• Even as industry consolidation trends and the company's balance sheet strength offer scope for opportunistic bolt-on acquisitions, the presence of localized oversupply in certain states, particularly where government-funded programs intensify competition, could dilute occupancy rates across newly acquired centers and limit synergies, thus putting pressure on both revenue growth and margin expansion over the longer term.

G8 Education Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on G8 Education compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming G8 Education's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.0% today to 8.3% in 3 years time.
• The bearish analysts expect earnings to reach A$89.6 million (and earnings per share of A$0.12) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, down 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

• Sustained declines in occupancy rates-reported at 64.5% for the half, down 3.7% compared to the prior corresponding period, with spot occupancy even lower-signal persistent weakness in demand, which directly weighs on core revenue and future earnings growth.
  
• Family affordability concerns driven by cost-of-living pressures and only modest increases in government subsidies have led to muted enrollments and fewer additional care days, threatening further revenue declines if these macroeconomic headwinds persist.
  
• Regulatory risks are increasing, with new compliance demands and government-mandated safety measures (such as broad CCTV rollout and other operational requirements) likely to drive up both capital expenditure and recurring costs, placing sustained pressure on net margins.
  
• Declining occupancy in younger cohorts, partially due to lower birth rates following the COVID-19 period, suggests demographic headwinds that could further limit enrollment-driven revenue growth in the coming years and may not be meaningfully offset by short-term birth rate upticks.
  
• Executives themselves highlight that the majority of recent profit improvements have come from cost savings and procurement initiatives, but they acknowledge diminishing capacity for further cost reductions, meaning future earnings are increasingly exposed to stubbornly weak occupancy or topline growth shortfalls.

Valuation

• The assumed bearish price target for G8 Education is A$0.9, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$89.6 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of A$0.84, the bearish analyst price target of A$0.9 is 6.7% 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.