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Fund manager thinks this ASX small cap is cheap

Matthew Kidman believes ASX small cap Think Childcare Ltd (ASX: TNK) is looking cheap.

Think Childcare, as the name might suggest, is the owner and operator of 55 childcare centres, mostly located in Victoria.

Mr Kidman published an article for Livewire outlining why he expects Think Childcare to expand substantially in the coming years:

Reasons to buy

Think acquires a lot of its centres from an incubator on a contracted 4x EV/EBITDA multiple once the target has reached certain milestones.

The childcare industry has faced a number of headwinds in recent times that hurt occupancy. Obviously, occupancy is one of the key factors for profit because you have a high fixed cost base. An oversupply of childcare centres in recent times has hurt all listed childcare operators like Think and G8 Education Ltd (ASX: GEM). That’s why the Think share price is down significantly since all-time highs.

However, Think and G8 recently updated the market to say that occupancy was growing again. The government’s new subsidy program is helping.

With bank lending standards now rising, the short-term problem of centre oversupply may end at some point in 2019.

The positive updates for the industry could be a catalyst for the Think share price with more certainty around future earnings.

Foolish takeaway

Mr Kidman believes the Think Childcare valuation is undemanding. He said it’s currently trading at around 10x FY19’s earnings with a potential for organic occupancy increases and a pipeline of accretive acquisitions.

I agree with his thesis, Think could be a market-beater over the next year or two, but I wouldn’t expect it to be a strong performer for the long-term.

Motley Fool contributor Tristan Harrison 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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