The G8 Education Ltd (ASX: GEM) share price has rallied nearly 60% from its low of $1.91 in late October of 2018. A rebalancing of childcare centres and the potential of government subsidies could make the G8 Education share price a long term buy.
Oversupply fears extinguished
G8 Education is the largest childcare operator listed on the ASX with over 500 centres across Australia. The company operates a wide brand of facilities which include Bambinos, Sandcastles, Headstart and Jellybeans.
In late 2018 the childcare sector was awash with fear as the rapid building and expansion of new childcare centres caused a mismatch between supply and demand. Investors were fearful of G8's ability to offer sustainable growth given low occupancy levels, rising wage costs and the prospect of lower earnings.
Fast-forward to 2019 and the supply and demand of childcare centres has balanced out thanks to strategic placement of locations and the closing of underperforming centres. In expanding operations, G8 strategized to open new centres in specific catchment areas where there was a high proportion of children, especially those aged under four. In addition, G8 has flagged intentions to offload eight underperforming centres in order to obtain better occupancy rates.
Federal election benefits
With a looming federal election, the childcare industry seems to be in a relatively good position. Currently the government subsidises 15 hours of pre-school for four-year olds. If elected, Labor has pledged $9.8 billion over a 10-year period to offer the same service to three-year olds. The industry expects that federal government support from both parties will continue to increase given the growing population of children and increasing participation of females in the workforce.
Soft earnings
Earlier this year G8 reported half year results which reflected the challenging business conditions. EBITDA declined 10.1% to $149.1 million and earnings per share were 17.5 cents, a 19.5% fall from the year prior. Net profit was down 10.8% to $71.9 million, below market expectations of $78.15 million. A highlight of the report was total revenue which was up 7.7% from the previous year to $858.2 million. Given the saturation of the market, average occupancy fell 1.9% to 74%.
Broker note
Recently the Macquarie equities desk retained an outperform rating on G8 Education and maintained a $3.45 price target. Analysts cited a recent trading update from G8 Education as a positive sign that the company will meet industry and market expectations for full year earnings and occupancy growth.
Foolish takeaway
In my opinion, the G8 Education share price has great potential for a long term buy given the growing population, changing workforce and continued support from the federal government. With a 5.31% dividend yield the share price may also appeal to income investors. However, given the collapse of ABC Learning centres a decade ago it is understandable that investors remain cautious.
