The Motley Fool

Childcare sector hots up with another IPO

The success that G8 Education Ltd (ASX: GEM) has enjoyed since listing in March 2010 has spurred increased competition in the childcare sector.

Just last week, Think Childcare & Education Ltd (ASX: TNK) listed on the ASX, and follows on from the listing of Affinity Education Group Ltd (ASX: AFJ) in December last year.

Think Childcare has 30 centres under its belt, with 15 of those acquired from entities associated with the company’s chief executive officer Mathew Edwards. 28 of the centres are located in Victoria, with two in NSW, providing roughly 2,244 childcare places. Think Childcare has also contracted to manage 17 externally owned centres, but has the potential to acquire these at a later date.

At the offer price of $1.00, Think Childcare was trading on a prospective forecast yield of 7.2% for the 2015 financial year, but share have already risen 30% to $1.30. Still, even at current prices, Think Childcare is trading on a prospective P/E ratio of just 11.7x. In contrast, G8 Education sports a prospective P/E of 15.2x, while Affinity looks the cheapest with an 8.9x P/E ratio for 2015.

G8 is the obvious gorilla in the sector with 349 Australian centres, and another 18 in Singapore, for a total of 24,816 childcare places.

Think Childcare says that consolidation in the sector is still in its early stages, and intends to follow the lead of its bigger competitors by acquiring further childcare centres, or entering into management agreements with externally owned centres. And the likelihood of further consolidation and the arrival on new players is high.

While G8 is the leading listed company – it only has an estimated 5% market share in Australia. Goodstart Early Learning is the market leader with 12%, while Affinity has an estimated 1% – with Think Childcare holding even less. An estimated 81% of the childcare market is up for the taking.

The problem for the existing consolidators is that more competition with other consolidators is likely to drive up the prices of child care centres. G8 has a stated goal of buying centres for around 4 times earnings before interest and tax (EBIT), but may be forced to revisit that as competition increases.

Investors will need to keep an eye on the prices paid by new acquisitions by all of the above companies. Should they start to blow out to unreasonable levels, the ghost of ABC Learning could rear its head.

The sector may be hot, but here's one company that's flying under the radar. With a solid fully franked dividend and strong growth prospects, it should be on the radar of all investors.

Don't miss it! Top Motley Fool investment advisor Scott Phillips has just named his #1 dividend-paying stock for 2014-2015. With solid growth prospects and a fat, fully franked dividend, this ASX stock could be a huge winner for your portfolio. Discover the name and code FREE by clicking here now, enter your email address, and we'll send you the FREE report right away!

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!