Many readers will be familiar with G8 Education Ltd (ASX: GEM), one of 2013's success stories that also boasts an impressive 6,273% (!) growth in the past five years. Through a combination of aggressive acquisitions, debt and rights issues, G8 has delivered astounding results, and shows no signs of slowing down.
It will soon have competition however, with new kid on the block Affinity Education Group Ltd (ASX: AFJ) listing on the ASX late last year and following much the same strategy of using acquisitions to drive earnings growth.
Asides from the centres it already owns and they earnings they provide, Affinity's chief calling card is its $100 million, undrawn debt facility with the Commonwealth Bank of Australia (ASX: CBA), which is significant for two reasons:
1) It shows a vote of confidence from Australia's largest lender – despite the rise in property loans of late, banks require a significant margin of confidence in a company's ability to repay debt before handing over funds.
2) As a ballpark figure, $100 million is enough to roughly double the number of childcare facilities (and thus earnings) operating under the AFJ banner.
G8 Education has shown the market just how well the model can work, and if Affinity's centres and management are of similar quality I'd expect a high level of performance over the coming five years.
Better yet, there's still plenty of room in the childcare market to ensure both businesses can expand for many years before coming into conflict with each other, and Affinity's strategy of buying businesses at a low price-earnings ratio ensures a rapid return on its investment.
However investors should note that AFJ has not yet shown a 'real' full year result – the 2013 annual report showed a massive loss that was due primarily to initial centre purchases coming too late in the calendar year to show much in the way of earnings.
Thus I would be waiting for at least a half yearly report – which should be out soon – to show a normal year's trading figures before making a purchase. For those who are interested, Affinity is very much a case of buying now (forsaking a dividend) for the prospect of explosive growth and dividends in the future.
In that approach it's not unlike buying a resource company just as they strike it big – except that Affinity has the benefit of strong cash flows, less investment in equipment and a more defensive nature. I certainly wouldn't bet against it.
It's not the right share for everyone however, which is why I've included a link here to our top analyst's report on The Motley Fool's 'story' stock for 2014/15. Not only does it share its great price and growth prospects with Affinity Education, it boasts greater security and a dividend.
This report is completely FREE and can be accessed by clicking the link below and entering your email address – it takes less than 30 seconds. You'll also be signed up to our free investing newsletter, Take Stock, which is chockers with investing insight and the latest in market news.
