Childcare operator G8 Education Ltd (ASX: GEM) has this morning announced the acquisition of eight new premium childcare and education centres as it continues to roll-out its brand-name across the country.
In an announcement to the market this morning, the company said that it was purchasing the eight centres for a total of $12.06 million (excluding transaction costs), which it will fund from existing cash reserves. The acquisitions will increase the number of places by 855 to a massive 35,125 places per day in Australia.
Here's why G8 Education is a buy
G8 Education's roll-up strategy has caused plenty of debate amongst investors. While some would argue that this strategy has enabled it to generate enormous returns for shareholders over the last several years (its shares are up 525% over the last five years), others would argue that it is a dangerous blend that could soon replicate the train-wreck that was ABC Learning.
While every aggregation strategy carries its share of risk; G8 Education has thus far proven its ability to improve operations within its centres whilst also managing to decrease staff turnover and increase profits. Of course, investors need to remain wary of the price G8 is paying for its new centres to ensure that growth can be sustained, but at this point it appears to remain well on track.
Despite an increase in competition within the sector from companies such as Affinity Education Group Ltd (ASX: AFJ), G8 Education managed to remain within its stated acquisition plan with these eight new centres, picking up the new centres at a cost of 4x anticipated earnings before interest and tax (EBIT). It also expects them to contribute to EBIT immediately.
Investors should also note that G8 Education remains well placed to profit from the government's latest federal budget. Treasurer Joe Hockey said that an additional $3.5 billion would be allocated to childcare in an effort to improve affordability and access to the sector, whilst also encouraging new parents to get back to paid work sooner rather than later. Further, it also provided scope for G8 Education to increase its price per child which could lead to even greater profit growth.
The stock is currently trading at just $3.75, down from a September-high of $5.63. Given its strong growth potential and heavily discounted price, investors should certainly consider adding G8 Education to their portfolio today.
