G8 Education (ASX:GEM)

Gary Carroll
CEO & MD
Market Cap (AUD): 1.22B
Sector: Consumer Discretionary
Last Trade (AUD): 2.67 +0 (+0%)
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1. About

G8 Education Limited is a leading provider of quality care and education facilities across Australia and Singapore through a range of well-respected and recognized brands.

Its mission is to be Australasia’s leading provider of high quality developmental and educational child care services. The Company aims to achieve this through:

  • A portfolio of outstanding early childhood education brands
  • A focus on the importance of early childhood education
  • By making good centres great through focusing on outstanding early childhood education management

2. Business model

 

The Company operates through following divisions:[1]

 

Divisions

Revenue ($’000)

% of total Revenue

% of Profit (before Int & Tax)

Profit drivers[2]

Australia

$772,537

97.9%

N/A

Group revenue increased by $18m with revenue Growth from 2016 & 2017 acquisition ($29m & $18m respectively) and organic fee increases being offset by:

  • Lower LFL occupancy (3.2%)
  • Increased discounting activity ($5m)
  • Increased training investment and LDCPDP net funding impact vs PCP ($9m)
  • Divested centre revenue ($15m)

Foreign Country

$16,506

2.1%

N/A

3. Strategy

 

Key strategies include:[3]

 

  • The Company expects the operating environment to be challenging during the first half of 2018, driven by the current supply overhang in many areas throughout Australia. The Company will be responding to such an environment by driving occupancy focus throughout the network
  • In July 2018, the Federal Government will be rolling out an enhanced funding package to the sector, focused on increasing affordability of early education, particularly for low to middle-income families. This package is expected to be positive for the vast majority of the Group’s existing families, although the timing and quantum of the resulting impact on occupancy is unknown
  • The Company continues to believe that there are significant organic and acquisition growth opportunities for the Group. Its growth strategy contains the following key elements
    • Driving occupancy in existing centres through development of a differentiated offer focused on quality and education, value, as well as customer experience. To facilitate this, the Group will continue to invest in improving asset and curriculum quality, while also developing new revenue streams for existing and new centres that deliver enhanced value to its families and better utilise its existing assets
    • Being the employer of choice by engaging and developing its team through a series of initiatives such as enhanced professional and leadership training and re-engineering its incentive framework
    • Continuing to grow its network of child care centres through acquisition and greenfield development, working with its established providers who continue to produce quality assets at reasonable prices
  • The Company continues to believe this strategy, supported by a passionate and capable team, will leave it well placed to deliver sustainable value to children, families and its shareholders in the years ahead

4. Markets

 

The Company operates in markets including :[4]

 

Industry

Industry Revenue (2017)

Growth Rate (Annual 13-18)

Child care services

$11 billion

8.1%

5. Competition

 

  •   InvoCare Limited (ASX:IVC)[5]
  •   Navitas Ltd (OTCMKTS:NVTZF)
  •   Paragon Care Ltd. (ASX:PGC)
  •   Success Global Media Ltd (ASX:SGU)

6. History

 

2010[6] 

Early Learning Services Limited merged with Payce Childcare Pty Ltd. The merged group formed is G8 Education Limited

 

2011  

Ended year 135 owned centres (Australia), 7 owned centres (Singapore) and 64 franchised centres (Singapore)

 

2012  

Settlement of Koala childcare, Kinder Haven Child Care, Little Einstein child acquisitions.

 

2012  

Ended year with 167 owned centres in Australia and 8 owned, 10 managed and 51 franchised centres in Singapore

 

2013  

Settlement of treehouse Geelong and Bellnore Drive childcare and education centres

 

2013  

Purchase of new head office

 

2013  

Settlement of rose garden and leaping learners

 

2014  The Group signed a revised facility agreement with the bank western australia which extends the team of senior debt facility until march 2017

 

2014  

The Group announced the acquisition of 91 Childcare education centres

 

2014  

The Group announced the acquisition of 7 Childcare education centres

 

2015  

G8 Education Limited to acquire 8 premium childcare and education centre

 

2016  

The Group acquired 19 early education centres in Australia and 2 in Singapore, bringing the total number of centres as at 31 December 2016 to 490 in Australia and 20 in Singapore

 

2017  

G8 Education Limited to acquire 19 early education and childcare centres

7. Team

 

Board of Directors[7]

 

Mark G. Johnson – Non-Executive Chair

Gary Carroll – Managing Director / Chief Executive Officer

Brian Bailison – Non-Executive Director

Susan Forrester – Non-Executive Director

David Foster – Non-Executive Director

Professor Julie Cogin – Non-Executive Director

Margaret Zabel – Non-Executive Director

 

Management Team

 

Gary Carroll – Managing Director / Chief Executive Officer

Jason Ball – General Manager of Operations

Sharyn Williams – Chief Financial Officer[8]

Tracey Wood – General Counsel and company secretary[9]

Jessica Battersby – Human Resources Manager

Peter Nelson – IT Manager

Greg Bowell – General Manager Marketing

Rod Anderson – General Manager Property


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year ended 2016/17[10]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int & Tax) ($’000)

% Change

Australia

$772,5373

2.1%

N/A

N/A

Foreign Country

$16,506

11.8%

N/A

N/A

Total

$789,043

2.2%

$117,781

2.71%

9. Risk

 

Major risks include:[11]

 

Foreign exchange risk

The Group has operations and borrowings in Singapore and is exposed to foreign exchange risk associated with the Singapore dollar. Foreign exchange risk arises from future commercial transactions and from recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The foreign exchange risk associated with the Singapore operations is managed through a natural hedge as the cash flows from the Singapore operations are denominated in Singapore dollars. The Group also has current Singapore dollar denominated corporate notes outstanding with a total value of SGD$270m. On 18 May 2016 the Group entered into a cross currency swap agreement to hedge against.

  • Changes to the AUD/SGD forward rate at inception to mitigate the foreign exchange exposure on the highly probable repayment of SGD denominated borrowings (Senior Unsecured Notes issued under G8’s SGD$600m Multi-currency Issuance Program); and
  • The foreign exchange exposure on the coupon payments associated with the SGD$270m corporate notes where the group pays 6.54% on AUD$269,892,043 and receives 5.50% on SGD$270m.

In the prior year, the Group closed out an AUD/SGD put option that was purchased to hedge against the currency risk of the SGD$260m unsecured May 2017 notes. The gain on this put option has been reflected through the income statement in the prior year.

On the 18 May 2016, the Group purchased an AUD/SGD call option with a notional value of through the income statement in the prior year SGD$270m, strike price of $1.175 and maturity date of 18 May 2019. This instrument is not designated as a hedge instrument and was purchased as an additional layer of counter-party security that ultimately eliminated collateral posting requirements. The movement in the value of this option is recognised through the income statement

 

Interest Rate Risk

Cash flow and fair value interest rate risk

The Group’s main interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk if the borrowings are carried at fair value. Group policy is to maintain between 50% - 80% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2017 and 2016, the Group’s borrowings at variable rates were denominated in Australian dollars only.

The Group’s fixed rate borrowings and receivables are carried at amortised cost. They are therefore not subject to interest rate risk as defined in AASB 7, since neither the carrying amount nor the future cash flows will fluctuate because of a change in market interest rates. The corporate notes denominated in Singapore dollars are all fixed rate notes

 

Credit Risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to trade and other debtors. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised below.

 

Liquidity Risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

 

Capital risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

References

  1. ^ Annual report 2017 P. 53, 55
    https://www.listcorp.com/asx/gem/g8-education/news/annual-report-to-shareholders-1823039.html
  2. ^ Investor Presentation 2017 P. 03
    https://www.listcorp.com/asx/gem/g8-education/news/g8-education-investor-presentation-fy17-1823037.html
  3. ^ Annual Report 2017,  P. 17
    https://www.listcorp.com/asx/gem/g8-education/news/annual-report-to-shareholders-1823039.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=626
  5. ^ http://quotes.wsj.com/AU/XASX/GEM
  6. ^ Investor presentation  2014, P.08-10
    http://g8education.edu.au/wp-content/uploads/2013/09/Investor-Presentation-26.11.2014.pdf
    https://g8education.edu.au/wp-content/uploads/2013/09/8-Preimum-Childcare-Centres-020615.pdf
    Annual report 2016 P. 6
    http://g8education.edu.au/wp-content/uploads/2013/09/Annual-Report-2016.pdf  
    https://www.listcorp.com/asx/gem/g8-education/news/acquisition-of-19-early-education-and-childcare-centres-1686466.html
  7. ^ http://g8education.edu.au/about-us/board-of-directors/
    http://g8education.edu.au/about-us/management-team/
  8. ^ https://www.listcorp.com/asx/gem/g8-education/news/company-secretary-appointment-resignation-1869122.html
  9. ^ https://www.listcorp.com/asx/gem/g8-education/news/company-secretary-appointment-resignation-1869122.html
  10. ^ Annual report 2017 P. 53, 55
    https://www.listcorp.com/asx/gem/g8-education/news/annual-report-to-shareholders-1823039.html
  11. ^ Annual report 2017 P. 70-73, 81
    https://www.listcorp.com/asx/gem/g8-education/news/annual-report-to-shareholders-1823039.html