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Tuesday 01 April 2014 by FIIG Research Legacy

GEM Research Report 2014

Executive Summary

G8 Education Ltd (GEM) is Australia’s largest publicly listed operator of childcare centres with 234 childcare centres in Australia at the end of FY13
Despite being the largest private operator in the sector GEM only maintains 4% of the total market providing scope for further expansion in what is a largely fragmented market
GEM has adopted a disciplined acquisition growth strategy similar to the strategy successfully implemented by S8 Ltd where a number of GEM’s senior executives and board members also held positions. In addition to this, we take comfort in GEM’s acquisition history to date and public undertakings of the company
GEM operates a multi-brand strategy which allows centres to operate largely autonomously, whilst overlaying the group’s corporate disciplines across the portfolio
GEM has a strong equity base with current market capitalisation of circa $1 billion. GEM has historically funded itself through the equity market and in addition has now accessed the bond market twice through FIIG. As a result of the continued equity raisings, GEM maintains a moderate level of gearing. With a significant cash balance at year end, post this issue net gearing will still remain at a consistent, manageable level
The fundamentals of the Australian child care sector remain very strong with government spending on the sector continuing to increase over recent years and the provision of child care services is now a central tenet to policy outcomes
The demand for child care services is rather price inelastic with demand from higher income demographics very strong whilst lower income households enjoy a higher level of government support
The key risk for the child care sector is the performance of the overall economy. A significant and prolonged increase in the unemployment rate would have a negative effect on demand
Investors in the senior unsecured bonds rank behind the secured bank lender, however have protection through covenants specific to the unsecured issue as well as covenants present in the secured bank facility
Offering a floating rate of return paid quarterly in arrears of 90 day BBSW + 3.90%, the bonds provide investors the opportunity to diversify their fixed income exposure into a key sector of the economy whilst earning an attractive floating rate of return

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