Another day, another 'Trading Update' – this time from childcare operator G8 Education Ltd (ASX: GEM). Investors will be glad it wasn't as bad as some of the other trading updates we've seen recently, but the announcement in itself was a little concerning.
With 10 months of sales recorded, and applying forecasts for the remaining two months of the current financial year, G8 expects its full-year Earnings Before Interest and Tax (EBIT) to be between $158 million and $162 million. This is basically flat on the $160.4 million in EBIT that the company earned last year, and indicates shareholders shouldn't expect any growth, despite the acquisition of a small number of new centres over the past year.
Readers saw back in August that G8's first half results were disappointing, and the company flagged an improvement in the second half once it got the chance to work around regulated changes to staff ratios. Specifically, increases in staff expenses as a percentage of revenue were responsible for the first half results, and lead to lower profit margins.
In order for G8's EBIT to come in at around the same levels as last year, costs must have been contained at or slightly above their historical levels (as a percentage of revenue). Management confirmed as much in today's announcement.
This will be a relief for shareholders, with some worrying that the company had minimal ability to raise its prices to accommodate higher operating costs. However, it appears as though fears about G8's growth potential are well founded.
Is it a buy?
While the company may be experiencing 'organic' growth, the half-year presentation showed that recent acquisitions had only grown EBIT by 1% per annum since the acquisition, versus 8% for earlier purchases. With full-year EBIT forecast as being flat on last year's EBIT, I think investors can safely conclude there will be minimal growth coming from G8 in the near future.
Fortunately G8 is already priced for minimal growth, and in my opinion the company is pretty good value today – a low price and a strong dividend, combined with demonstrable proof of being able to maintain margins over the past five years. Investors do need to be aware of what they're buying, however, and growth doesn't appear to be on the menu.
