Monday 20 February 2017 by William Arnold Company updates

G8 releases sound 2016 results and announces A$212.8m equity raising

G8 has released its full year 2016 results, and announced an equity raise through CFCG Investment Partners International

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G8 has released its full year 2016 results, reporting an 11.3% increase in underlying EBITDA to $172.4m and slightly weaker credit metrics.

CFCG Investment Partners International (Australia) Pty Ltd (CFCG) has agreed to invest circa $212.8m in G8. CFCG will invest at $3.88 per share; a 9% premium to the last closing price of G8 shares on 17 February 2017.

G8 Managing director Gary Carroll said it will consider possible opportunities with CFCG in China following the capital raising. "Over the next few months, we will evaluate whether there are viable opportunities for G8 to utilise its expertise to collaborate with CFCG in the childcare and early education market in China," Mr Carroll said.

CFCG has made a series of investments over the last two years to build its presence in the education sector in China, according to G8.

We view the A$212.8m equity raise as credit positive – it will be used to pay out A$90m of debt and support centre acquisition. G8 forecasts net debt to EBITDA will reduce from 2.2x (Dec 2016) to 1.7x. The group will target to maintain gearing at around this level. 

$212.8m equity raise

The equity placement will be conducted in two tranches, with 30% to be settled on 24 February 2017 and the remaining 70% on 17 May 2017.

The proceeds of the placement will be used as follows:

  • Paying down the $50m BBSW +3.9% bond facility maturing 3 March 2018, and the $40m of the Bankwest overdraft
  • Assisting in the funding of centre acquisitions totalling approximately A$200m which are due for settlement over the next two years. The A$200m in acquisitions that have been identified comprise of 49 centres throughout Australia. The acquisitions are covered by existing development agreements that specify purchase prices of around 4x forecast EBIT, in line with the company’s target pricing. The acquisitions will generate approximately $50m of annualised EBIT upon completion.

Results summary


Source: Company reports

Key points:

  • Revenue increased 10.2% in 2016 from the prior year, driven by fee increases and acquisitions
  • Underlying EBIT increased 10.5%, driven by organic growth in 2H16 and acquisitions
  • Underlying NPAT grew by 7.1% for the year, lower than EBIT growth due to higher financing costs
  • On an underlying basis, 2016 like for like (LFL) centre EBIT margins grew by 0.4% during the year. 2H16 saw a significant improvement in EBIT performance for LFL centres over 1H16, with savings in wages and childcare expense more than offsetting increased investment in training and higher rent expense.

Occupancy


Source: Company reports

In 2016 occupancy decreased by 2.2%, driven by:

  • Increased supply in ACT and pockets of NSW (northern beaches and inner Sydney)
  • General market wide weakness in WA and North Queensland, with the effect being slightly more pronounced in both areas over 2H16.

Slowing acquisition


Source: Company reports

In May 2016, G8 stated that the company’s fastest growth period is likely over. Managing director Chris Scott said that acquisitions will still be important but no longer the main focus. Further, he said the company will concentrate on the qualitative issues, in particular “development and training”.

As at 31 December 2016 the group operated 490 centres in Australia and 20 centres in Singapore, bringing the total licenced places to 38,713. There are 28 acquisitions scheduled to be completed during 2017 for a total cost of approximately $80m, with annualised EBIT of circa $20m.

Credit metrics


Source: Company reports

Key points:

  • In May 2016 G8 stated a gearing target (net debt/equity) of 45% and a leverage target (net debt to EBITDA) of 2.0x or under
  • Credit metrics weakened during the period. Gearing of 43.0% remains under the company’s target (net debt/equity) of 45%. Leverage of 2.23x is above the 2.0x target
  • The Group continues to have head room in relation to its financial covenants
  • G8 has calculated that, following repayment of the A$50m BBSW +3.9% bond facility maturing 3 March 2018 and the A$40m of the Bankwest overdraft, the group’s reported net debt to EBITDA ratio (calculated on a historical basis) will reduce from 2.2x to 1.7x. The group is aiming to maintain gearing at around this level

 

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