This article is from the Australian Property Journal archive
MORE than $457 million was wiped off the value of childcare centre giant G8 Education yesterday after investors learned the group was cutting its earnings forecast due to challenging conditions in the sector.
G8 slashed its underlying EBIT forecast by more than half, to $160 million for FY2017, which reflects a 5% increase on the previous year, after adjusting for movements in Long Day Care Professional Development Program Funding (LDCPDP).
It is well below the FY2016 underlying EBIT growth of 10.5%.
That earnings downgrade did not sit well with investors, G8 shares fell as low as $3.31 yesterday before staging a recovery and closing 23.08% or $1.02 lower at $3.40.
The big fall wiped $457.50 million from the company’s market capitalisation, bringing it down to $1.525 billion.
According to Burgess Rawson’s recent report, G8 is the second largest player in the sector with 500 centres or a 4.8% share of the market, behind Goodstart (643 centres – 6.2% share), which is owned by a consortium of The Benevolent Society, Mission Australia, the Brotherhood of St Laurence and Social Ventures Australia.
Affinity is a distant third placeholder with 150 centres or 1.4% share.
Managing director Gary Carroll said it has been a challenging period over the last 18-24 months.
He said there has been a recent slowing of occupancy growth, with average like-for-like occupancy for FY2017 forecast to be circa 77%, compared to 79.7% for FY2016.
“Whilst the group has seen improvement in team turnover and initial small signs of recovery in Western Australia, these positives have been offset by market wide factors including supply issues in areas such as Western Sydney, Gold Coast, East Brisbane and Inner Melbourne.
“And continuing sluggish wage growth and employment conditions in regions such as North Queensland,” he added.
Carroll said a change in regulatory requirements in relation to staffing ratios during breaks in NSW, SA and Victoria, which took effect from 1 October, it has increased staffing costs.
“While G8 had been aware that current arrangements were due for review by regulators in a number of states, we expected other states to mirror Queensland by extending the current structures until the end of 2019. While the impact of such changes will be neutralised over the coming months as internal casual labour pools are increased and efficiencies are generated, the FY2017 impost of utilising temporary agency labour to meet immediate requirements is forecast to be approximately $3 million,” he continued.
Furthermore, the adverse impact of the LDCPDP Funding is expected to be around $9 million when compared to the prior corresponding period.
“While supply has been moderating over the course of 2017, the impact of new supply over the last 18-24 months has resulted in a challenging occupancy environment in FY2017.
“After adjusting for LDCPDP, we are forecasting an EBIT margin improvement of circa 1% on prior comparison period in FY2017. This is a credible result in the current challenging environment. We expect market conditions to continue to be challenging for the next 6-9 months. Looking forward, we are on track to implement the changes required for the new childcare funding package that comes into effect on 2 July 2018. The new childcare package is expected to be positive for a significant portion of G8’s existing family base.
“We are also on track with implementation of our three year strategic plan and are confident that this investment has us well placed to take advantage of the expected improved market conditions.” Carroll said.
Australian Property Journal
