At midday today, shares of Australia's largest listed childcare centre owner and operator, G8 Education Ltd (ASX: GEM) were down 5% following an announcement earlier in the day.
In a notice to the ASX, G8 Education said the settlement of 25 centres it announced in August 2014 was only partially complete. It said settlement for 17 centres had been completed but the remaining eight have been delayed by regulatory and licensing issues.
Settlement is now expected to take place in November 2015.
When assessing potential acquisitions, G8 Education endeavours to pay four times annual earnings before interest and tax (EBIT).
At the time it announced it'd acquire these 25 centres for $72.7 million plus an additional $10 million if profit was in-line with targets, G8 Education said the centres were being purchased at four times anticipated EBIT for the 12 months after settlement.
Today it said: "The EBIT associated with the 8 centres was expected to be $10 million in the twelve months post settlement."
At 31 December 2014, G8 Education had 455 child care centres.
Should buy G8 Education shares?
G8 Education is pursuing a 'roll-up' strategy whereby it uses its existing capital (cash and debt) to purchase new childcare centres at a low price. The basic premise of the strategy is that it issues new shares (at a high price) or borrows to buy new centres. The pricing mismatch between the company's shares and new centres, allows the company to grow profits per share very quickly.
G8 Education's smaller rival, Affinity Education Group Ltd (ASX: AFJ), is pursuing a similar growth strategy.
The common concerns many investors hold with G8 Education's strategy are: 1) It may overpay for new centres; 2) Its debt may become a problem; or 3) The occupancy rates will fall dramatically if unemployment rises.
However, on a positive note, at today's discounted share price of $3.36, its forecast dividend yield is a whopping 7.14% fully franked. Grossed-up for the tax-effective franking credits, that's a huge 10.2% dividend yield.
Undoubtedly there are risks in G8 Education's business model but if you think the strategy is viable the rewards could be worthwhile, especially in this low interest rate environment.
