The G8 Education Ltd (ASX: GEM) share price fell 3% to $3.04 following the release of its full year results this morning. Revenues were up 2% to $796 million and net profit after tax was flat at $80.6 million.
Management stated that "underpinning this performance were improvements in cost management including wage efficiency in the LFL centres and contributions from centres acquired in the 2016 and 2017 year."
Underlying earnings per share fell 12% to 21.8 cents per share, and G8 paid dividends of 18 cents per share during the year. A final quarterly dividend was not announced, as G8 mentioned in its August results that it would be switching to half yearly dividends in the future.
The dividend announcement on 23 February stated that G8 would pay 10 cents per share as dividends in March.
This reflects a dividend cut, as G8's underlying earnings per share of 21.8 cents are not strong enough to support a dividend of 6 cents per quarter (i.e., 24 cents per year). If earnings don't grow, the 10-cent dividend – if doubled for the full year – would mean that G8 will pay out almost all of its profit as dividends in 2019 as well.
On the business front, G8 added 37 new centres and divested 22, for a total of 516 centres. G8 reported that occupancy fell across the board:
This is partly due to increased supply with overall national supply rising 4% over the past 12 months. Money has unquestionably rushed into the childcare space. While G8 may find itself with a cost advantage as the largest incumbent, it also carries a significant amount of debt, with net debt being approximately $254 million as of 31 December.
Management stated that 2018 would be another year of reinvestment, with $27 million in capital expenditure, of which $22 million would be spent on upgrading centres. Over a longer term, G8 is targeting $0.40c in earnings per share, and revenue of $1.2 billion.
I personally think that G8 would be smart to cut its dividend further and start accumulating some cash in the event of a downturn in childcare demand. Rising government subsidies are expected to lead to another boom in demand, but even so it appears that supply is already growing to meet it. G8's an interesting business, and one that I held shares in previously, but I would be inclined to stay on the sideline for now.
