Optimizing Childcare Portfolio And Digital Adoption Will Boost Future Earnings

Key Takeaways

• Portfolio optimization and fee increases should improve occupancy, revenue, and net margins, boosting overall earnings.
  
• Digital adoption and team retention are expected to enhance operational efficiency and return shareholder value through EPS growth.
  
• Rising labor and regulatory costs, alongside occupancy and affordability challenges, could pressure revenue and profit margins, despite plans for strategic divestments.

Catalysts

Provides early childhood education and care services in Australia.

• Portfolio optimization through the divestment of underperforming centers and opening of new locations is likely to improve overall occupancy rates and center margins, positively impacting revenue and earnings.
  
• Continued improvements in team retention and reduction of agency staff usage are expected to lower operational costs and drive margin expansion, enhancing net margins and earnings.
  
• Implementation of fee increases and cost discipline, including the management of employment costs despite wage inflation, should support revenue growth and net margins.
  
• Adoption of digital solutions for compliance management and workforce planning is expected to enhance operational efficiency and utilization, potentially boosting earnings and net margins.
  
• An announced on-market buyback of up to 5% of the company’s issued capital is anticipated to return value to shareholders, enhancing earnings per share (EPS).

G8 Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming G8 Education's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach A$96.1 million (and earnings per share of A$0.11) by about February 2028, up from A$61.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 17.8x today. This future PE is lower than the current PE for the AU Consumer Services industry at 18.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

G8 Education Future Earnings Per Share Growth

Risks

• The flattening trend in occupancy growth from May onwards, due to challenges such as cost of living and family affordability issues, suggests potential pressure on revenue growth.
  
• The increase in labor-related costs, including an 8% wage inflation and additional superannuation and on-costs, could negatively impact net margins if they outpace revenue increases.
  
• The regulatory environment, including potential limitations on fee increases and government-mandated pay raises, might constrain profit growth and lead to tighter margins.
  
• Inquiries from families and occupancy rates have shown a slowdown, which could impact earnings if it leads to fewer discretionary bookings and lower overall enrolment numbers.
  
• Planned divestments and center closures might reduce revenue and earnings in the short term, even though they aim to enhance long-term profitability by focusing on higher performing centers.

Valuation

• The analysts have a consensus price target of A$1.49 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$1.8, and the most bearish reporting a price target of just A$1.35.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$96.1 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$1.37, the analyst price target of A$1.49 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.