Why now is the time to buy G8 Education Ltd

G8 Education Ltd (ASX: GEM) has seen its share price increase by a huge 5,000% over the past five years, making it one of the best performers on the ASX. G8 Education has successfully embarked on an aggressive and disciplined acquisition strategy in the highly fragmented childcare industry and is now the largest for-profit operator in Australia. However, is there more growth to come?

G8 currently has a portfolio of 361 childcare and education centres in Australia, and a further 78 contracted but not settled. G8 also has 18 centres in Singapore. However, G8 has a huge potential market in which it can continue to grow. The company estimates that there are 4,000 potential centres which it could acquire in Australia, and therefore it currently only occupies 5% of the potential addressable market.

G8 also has a number of competitive strengths, including:

  • Strong long-term demand for early childhood education centres as a result of increased female participation in the workplace.
  • Supportive government policies, including rebates and other financial incentives which contribute to G8’s revenue.
  • A multi-brand strategy, G8 operates 16 brands in Australia and 3 in Singapore to cater for the different needs of the respective community.
  • Management has been hugely successful in increasing occupancy rates and reducing costs in respect of acquired facilities, thereby increasing profitability of each acquired centre.

G8 operates in a highly-fragmented industry with huge room to grow. This enables G8 to be very selective in targeting potential businesses. Although the shares appear expensive trading on a price earnings multiple of 41 times, analysts have forecast earnings per share to increase by 48% in FY15 and therefore the current share price appears reasonable for such a high growth company.

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Motley Fool contributor Bradley Murphy does not own shares in any company mentioned in this article. 

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