Fast-growing childcare centre operator G8 Education Ltd (ASX: GEM) delivered a stunning 70% increase in reported annual net profit after tax following the company's biggest year of acquisitions, which totalled 203 new childcare centres added to the portfolio in financial year 2014.
The company's Australian childcare centre total number has risen almost five times from 88 in 2010 to 437 currently. G8 Education also operates 18 centres in Singapore.
This industry has great growth potential for a company like G8 Education to consolidate existing businesses. According to the company, there are about 9,200 service outlets in the Australian childcare market.
The current market leader is service provider Goodstart Early Learning, which operates 641 centres nationwide, according to its website. It took over about 570 childcare centres after the 2008 financial collapse of previous market leader ABC Learning. At its present growth rate, G8 Education could surpass Goodstart in the short term and take the crown as market leader.
When it acquires centres, a purchase requirement is to pay under four times the centre's earnings before interest and tax (EBIT). This puts financial discipline on the company to avoid overpaying for new assets. The company just announced yet another acquisition deal occurring after 31 December 2014, for 12 more childcare and education centres.
G8 Education projects the new centres will contribute to EBIT immediately upon settlement, which is expected to happen before the end of June this year.
Investors can appreciate that childcare is in high demand and in some cases an absolute necessity for many working families. The sheer amount of privately owned and operated childcare centres that currently exist attest to that. The Federal government also provides financial assistance, subsidies and tax deductions to help families afford the service.
That's why G8 Education's plan to expand makes it a very attractive growth story, similar to a chain business or restaurant building a nationwide network of stores.
Already over the past three years the stock has climbed 563% from $0.73 to $4.54. That's a fantastic result compared to the 38% gain of the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) over the same period. Investors may have missed out on that explosive growth, but as a long-term play, the overall growth may just be starting.
As long as the company can manage the increasing debt burden from the property and asset purchases, earnings growth could sustain further expansion. Like for like EBIT for recently acquired childcare centres are growing at solid rates, but those acquired before 2011 are beginning to show a slowing growth rate.
Investors need to stay on top of these revenue and earnings trends to adequately judge performance. Still, I believe the company has good growth prospects and could be a suitable addition to a long-term portfolio. The stock pays a healthy 3.1% fully franked yield.
