Government Investment In Kindergarten Programs Will Drive Higher Occupancy Rates

Key Takeaways

• Planned optimizations, including exiting underperforming centers and boosting employee retention, aim to improve operating margins and net profit.
  
• Increased revenue is anticipated from inflationary fee rises and government investments, with sustainability-linked debt refinancing enhancing financial flexibility.
  
• High inflation, slower occupancy, dependency on government subsidies, and the need to divest underperforming centers pose challenges to G8 Education's revenue and profitability growth.

Catalysts

Provides early childhood education and care services in Australia.

• G8 Education is focusing on optimizing its existing portfolio by exiting underperforming centers and refining its cost management strategies, which is expected to enhance revenue and operating margins.
  
• The company expects its revenue to benefit from both inflationary fee increases and government investments in kindergarten programs for 3
• to 5-year-olds, which are designed to drive higher occupancy rates.
  
• Strategic procurement initiatives and reduced reliance on agency staff due to increased employee retention are anticipated to lower operating costs and improve net margins.
  
• The ongoing share buyback program and disciplined capital management are expected to boost earnings per share (EPS) and enhance shareholder value.
  
• The recent debt refinancing into a sustainably linked loan provides greater financial flexibility, with potential interest cost reductions tied to achieving specific sustainability targets, thus potentially enhancing net profit after tax (NPAT).

G8 Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming G8 Education's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 8.3% in 3 years time.
• Analysts expect earnings to reach A$96.8 million (and earnings per share of A$0.12) by about March 2028, up from A$67.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 14.9x today. This future PE is lower than the current PE for the AU Consumer Services industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

G8 Education Future Earnings Per Share Growth

Risks

• The high inflation and cost of living pressures are challenges that could affect family affordability, potentially impacting G8 Education's occupancy rates and thus revenue and earnings growth.
  
• The slower start to 2025 occupancy, with year-to-date occupancy being lower than the prior comparative period, could signal potential ongoing challenges in maintaining and growing their revenue base.
  
• Concerns about the slow inquiry rates and the need for targeted marketing to drive inquiries and family retention may indicate potential struggles in maintaining revenue growth.
  
• The dependency on government subsidies and funding for wage increases highlights a potential risk; any changes or reductions in government support could impact operating costs and net margins.
  
• The company’s need to divest underperforming centers indicates challenges in consistently driving center performance, which could impact overall earnings and profitability.

Valuation

• The analysts have a consensus price target of A$1.526 for G8 Education based on their expectations of its future earnings growth, profit margins and other risk factors. 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$1.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.2 billion, earnings will come to A$96.8 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of A$1.28, the analyst price target of A$1.53 is 16.1% 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.