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Think Childcare Ltd share price sinks on half-year result release

The Think Childcare Ltd (ASX: TNK) share price has sunk almost 5% lower to $2.00 following the release of its half-year result.

Here are key takeaways from today’s release:

  • First-half revenue up 21.9% on the prior corresponding period to $29.8 million.
  • Half-year earnings before interest, tax, depreciation, and amortisation (EBITDA) increased 71.8% to $4.5 million.
  • Half-year profit after tax up 67.9% to $2.7 million.
  • First-half earnings per share of 6.4 cents.
  • Interim dividend of 4 cents per share fully franked.
  • Finished the period with 38 centres and 3,209 places. Plans to acquire four new high occupancy centres within 60 days.

Despite a difficult first-half for the childcare sector, I felt this was a solid result from Think Childcare and feel quite surprised with the share price decline.

Think’s management labelled the challenging environment as a perfect storm, highlighting three elements which came together in a manner that has never previously occurred.

These were related to the supply of new centres, historical birth rates and the number of children reaching school age versus childcare age children, and the $7,500 Child Care Rebate (CCR) threshold not being increased since 2012 against escalating fees.

These three elements ultimately led to a temporary decrease in occupancy levels, most notably in the older age groups which are the most profitable category for Think Childcare.

But the good news for the company and rival G8 Education Ltd (ASX: GEM) is that Think’s management is confident the storm will clear in 2018.

It sees all three factors dissipating, leading to a move from adverse conditions to more favourable conditions. This is expected to result in an increase in the number of children participating in childcare.

Which makes its acquisition of four new high occupancy centres expertly timed. These soon-to-be acquired centres, which are expected to complete within 60 days, will cost the company $10.6 million and be funded through existing debt facilities. This is approximately 4.8x EBITDA.

They will add an extra 278 places to its portfolio and currently boast occupancy levels of 91%.

Should you buy the dip?

Based on today’s result and the subsequent share price decline, Think Childcare’s shares are changing hands at just over 12x trailing earnings and provide a trailing fully franked 4.5% dividend.

I think this is cheap and offers a compelling risk/reward for investors, especially with management predicting that conditions in the industry will improve in 2018.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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