Why G8 Education Ltd shares are being crushed today

The market may be dropping lower today, but one share that has fallen more than most is G8 Education Ltd (ASX: GEM).

At the time of writing the childcare operator’s share price is down 6% to $2.34 on the day of its annual general meeting (AGM).

Why are G8 Education’s shares sinking lower?

This morning the struggling childcare operator released its AGM presentation and accompanying addresses from its chairman and managing director ahead of today’s meeting.

As you might have guessed from the share price reaction, they weren’t the most bullish releases I have seen out of the company.

According to today’s releases, supply continues to outpace demand in the childcare industry.

In 2017 supply growth exceeded demand growth by approximately 2.5% and played a key role in the company’s reduced occupancy levels.

While supply growth has slowed in 2018, data from Cordells and ACECQA shows that supply growth is between 1% and 1.5% ahead of current demand growth.

Because of this, G8 Education has seen like-for-like occupancy decline 2.5% to 3% on the prior corresponding period.

Management is optimistic that this will change in the second-half of FY 2018 thanks to the new Child Care Funding package. PwC has been assessing the impact of the new funding package and estimates that 95% of existing G8 families will be better off because of it.

While this may be the case, shareholders appear tired of management’s failure to deliver on its previous targets and have headed to the exits today.

One target the company is almost certainly going to fail to reach is its earnings per share goal of 40 cents by the end of FY 2019.

In his address this morning, CEO and managing director Gary Carroll admitted that the prevailing market environment and its impact on occupancy levels has made it clear this target is no longer achievable.

As such, the company will provide a new three-year earnings per share target when it releases its half-year results in August.

Should you invest?

I would stay well clear of G8 Education. While I am optimistic that the new funding package will be a major boost for the company and rival Think Childcare Ltd (ASX: TNK), I am concerned that it could ultimately encourage further supply growth.

Instead of childcare operators, I would suggest investors consider IDP Education Ltd (ASX: IEL).

G8 Education used to be a dividend star, so it is disappointing to see its performance decline so much. But the good news is that these new stars are rising.

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It's been a nail-biter of a reporting season here in the first half of 2018.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended G8 Education Limited. 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 Scott Phillips.

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