Non-cyclical shares, like those in the education sector, are usually spared the worst of an economic downturn. But the 2020 downturn was not like any other. It forced the closure of shops, educational facilities and many other services we previously took for granted.
Educational childcare company G8 Education Ltd (ASX: GEM) was one such company which experienced significant fallout from the government-ordered closures of childcare centres during the year.
As a result, the G8 Education share price tumbled by nearly 35% over the past year.
Let’s take a look at what’s been happening with G8 Education.
Recap of G8 Education’s performance in 2020
In its half-year results ending 30 June 2020, G8 Education reported operating earnings before interest and tax (EBIT) of $29 million, down 44% on the prior corresponding period. This was on the back of $308 million in revenue, which was down 28% on the prior period.
The company then followed this up with a trading update in November, announcing that its year-to-date EBIT stood at $98 million, which included current year wage costs relating to the employee payment remediation program.
The employee remediation program refers to the amount the company said it owed to employees between 2014 to 2020, after a self-review identified inadvertent non-compliance issues. That amount will be between $50 million and $80 million, and has been reported to the Fair Work Ombudsman.
Quick take on G8 Education
G8 Education operates a portfolio of around 500 childcare centres in Australia, with a further 17 centres in Singapore.
In Australia, around 60% of childcare costs are borne by federal government subsidies, which have consistently increased in recent decades. For example, subsidies increased in 2018 under the federal government’s Jobs for Families legislation.
Looking at G8 Education’s balance sheet, the company has a strong cash flow due to the working capital model inherent in the business. Parents pay for their children’s fees one month in advance, while staff are paid one month in arrears.
Over the past decade, G8 has grown via a series of acquisitions, which have been funded mainly via the issuance of debt. It’s worth noting that leveraged acquisitions are not without risks. This is evidenced by the collapse of ASX-listed ABC Learning – once the world’s biggest early childhood education company – in 2008 due to excessive debt as it tried to expand.
Outlook
In its presentation to investors in November, G8 Education said it expected 2021 to be a recovery year, given the absence of additional government subsidies and the ongoing impacts of COVID-19.
The company reported that, in 2021, it will focus on the divestment of its impaired centres, and the rollout of its new “greenfield” centres. Approximately 10 new greenfield centres are expected to open in 2021 with a capital outlay of approximately $4 million.
Approximately $10 million in capital expenditure will also be used in 2021 to execute the company’s strategy.
G8 Education share price snapshot
As mentioned, the G8 Education share price has lost around 35% over a year, however it has risen by around 36% over the last six months.
At the time of writing, the G8 Education share price is trading 0.86% higher for the day so far at $1.16. At this share price, the company commands a market capitalisation of around $983 million.
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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
The post Why the G8 Education (ASX:GEM) share price is down 35% in a year appeared first on The Motley Fool Australia.
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