Thursday 07 August 2014 by Legacy

G8 Education Ltd research report August 2014 - Retail

Executive Summary

  • G8 Education Ltd (G8) is Australia’s largest publicly listed operator of childcare centres with 349 childcare and education centres in Australia as at July 2014, a 49% increase in the number of centres as at the end of 2013 (234).
  • Despite being the largest private operator in the sector G8 only maintains approx. 6% of the total market providing scope for further expansion in what is a largely fragmented market
  • G8 has adopted a disciplined acquisition growth strategy similar to the strategy successfully implemented by S8 Ltd where a number of G8’s senior executives and board members also held positions. In addition to this, we take comfort in G8’s acquisition history to date and public undertakings of the company
  • G8 operates a multi-brand strategy which allows centres to operate largely autonomously, whilst overlaying the group’s corporate disciplines across the portfolio
  • G8 has a strong equity base with current market capitalisation of circa $1.6 billion. G8 has historically funded itself through the equity market and in addition has now accessed the bond market twice through FIIG, as well as raising additional unsecured debt through the international debt markets. As a result of the continued equity raisings, G8 maintains a moderate level of gearing
  • The fundamentals of the Australian child care sector remain very strong with government spending on the sector continuing to increase over recent years and the provision of child care services is now a central tenet to policy outcomes. The demand for child care services is rather price inelastic with demand from higher income demographics very strong whilst lower income households enjoy a higher level of  government support
  • The key risk for the child care sector is the performance of the overall economy. A significant and prolonged increase in the unemployment rate would have a negative effect on demand
  • G8 announced in May 2014 that it had completed a debt raising of SGD175m ($A150million) under an SGD500m multicurrency debt issuance programme. G8 has used part of the debt raising to pay out the outstanding balance of the senior secured bank debt facility (A$46.4m outstanding as at 31 December 2013), with the remainder being used to fund acquisitions

G8 now has no senior secured debt, although its overall debt outstanding has increased as a result of the recent unsecured debt issuance, and G8 has additional headroom under its debt programme to raise funding. It is likely that G8 will continue to access this headroom to fund further acquisitions, however investors in the FIIG-originated unsecured bonds have protection through financial covenants specific to the unsecured issuances. Despite the net increase in debt outstanding, G8 continues to be well placed to continue its expansion strategy with no secured debt and a strong balance sheet