G8 Education Ltd and Affinity Education Group Ltd: childcare services on a growth path

Schooling and education are fundamental in our society and every citizen spends years in some kind of formal instruction throughout their lives. As a business, childcare centres play a major role in providing a service to busy parents who may both work full-time to make a living. The constant need for childcare keeps the industry busy, but how are childcare companies as investments?

Here are two set for high growth that you should know.

G8 Education Ltd (ASX: GEM), a childcare centre operator, has been actively acquiring childcare businesses, now owning 233 centres in Australia, 18 in Singapore and 48 franchises in Singapore. Some of the brands it has are Early Learning Services, World of Learning and Community Kids.

This week it announced that another 63 childcare centres will be purchased for $105 million, the deal due to settle at the end of April.

According to managing director Chris Scott, together they will contribute about $26 million of annualised centre-based EBIT. It’s expected they will add to EBIT immediately upon settlement.

From 2010 to 2012, total annual revenue climbed from $66 million to $174.8 million, and during the same period NPAT more than quadrupled to $19.7 million. It will be reporting 2013 full-year results this month.

In December it announced the annual dividend will increase to 14 cents per share, up from 12 cps. Its dividends are paid quarterly, so the quarterly dividend will rise from 3cps to 3.5cps fully franked.

Affinity Education Group Ltd (ASX: AFJ) also operates childcare centres, with 57 owned and another 11 managed in Australia. The company listed in December 2013 and has also been on an acquisition path throughout the past year.

From its incorporation date of 21 May 2013, the prospectus forecasts pro-forma total revenue of about $2 million for the period up to 31 December 2013, so this does not represent a full year of business.

Looking forward, its pro-forma revenue forecast for the first six months ending 30 June 2014 is $37.7 million, and in the next six months ending 31 December 2014 the pro-forma revenue forecast is $43.6 million.

Pro-forma statutory NPAT for the period of 21 May – 31 December 2013 was forecast to be a $8.98 million net loss. It has forecast a pro-forma net profit after tax of $7.8 million for the 12 months ending 31 December 2014.

Foolish takeaway

Investors watching the performance of childcare service companies may be amazed at the growth in earnings and share price. Affinity Education is up about 34% to $1.39 since listing in December and G8 Education has shot up about 120% to $3.65 over the past 12 months.

The childcare industry is highly fragmented, so potential growth is there, but investors have to watch out for growth that can stress financial strength. You want to know how much debt companies are taking on to pick up new centres and once they have them how performance numbers stack up, such as return on equity, return on capital and net profit margins.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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