Did this childcare centre operator just become a buy?

G8 Education Ltd (ASX: GEM), Australia’s largest listed early childhood education and care provider, has suffered a horror 2018, with its share price slumping more than 50% over the last 12 months.

This is largely due to regulatory changes which have increased wage expenses, as well as a new subsidy regime which came into play in July and the rising supply of childcare centres in Australia, which are putting downward pressure on occupancy rates across the industry.

Could a new government be just what G8 Education needs?

Last week Labor party leader, Bill Shorten, pledged to expand existing childcare subsidies to give three-year-old children access to 15 hours of subsidised weekly care at preschool if it wins the next election.

This promise is valued at $1.75 billion over four years according to Mr. Shorten, a value the opposition is well placed to fund if it follows through with its array of planned tax reforms, including adjustments to the existing capital gains tax framework and the scrapping of some existing dividend imputation credit refunds currently available to investors.

This additional funding to the sector would provide a significant tailwind for childcare operators like G8 Education and would be likely to put upward pressure on the occupancy rates of its centres, therefore, strengthening its revenues in the medium term.

What is also promising for G8 Education is the apparent likelihood of a Shorten Government come election time in 2019, with the Labor party maintaining a strong 53-47 lead over the Coalition on a two-party preferred basis.

Should you buy G8 Education at today’s prices?

With G8 Education shares trading close to the $2 mark, it could be an attractive investment for value investors looking to get exposure to the childcare industry.

G8 Education is currently trading at a modest price-to-earnings multiple of 10.9 and is expected to produce fully franked dividends of 16 cents per share in 2019 according to Morningstar estimates, resulting in a very healthy fully franked yield of around 11% at a share price of $2.

The outlook of the childcare sector is also improving, as a slowdown in the rate of supply growth is expected in the short to medium term, while demand for centres is forecast to increase consistently as a result of the Jobs for Families package. These promising fundamentals would be further bolstered by Shorten’s proposed subsidies which aim to have 90% of three-year-olds enrolled in preschool by 2023.

Foolish Takeaway

If G8 Education maintains a prudent and disciplined network growth strategy in combination with the improving sector fundamentals, I believe the company could turn its luck around soon.

G8 Education is expected to provide a performance update in late October / early November- so if you are looking to invest, now may be a good time to do so.

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Motley Fool contributor Gregory Burke has no position in any of the 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 Scott Phillips.

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