What's happening with the ASX childcare sector?

Prior to the federal election, ASX childcare sector share prices such as G8 Education Ltd (ASX: GEM) headed upwards in anticipation of an ALP victory. What's happening now?

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Leading up to the May federal election, ASX childcare sector share prices headed upwards in anticipation of an ALP victory and with it a suite of new policies for the sector.

We all know the unexpected results of the election, so how has the dust settled for the childcare sector now that we're a couple of months down the track? 

G8 Education Ltd (ASX: GEM)

G8 Education is one of the leading providers of childcare services in Australia and also provides services in Singapore. G8 Education manages and operates a total of 519 centres across both countries. In February, the company announced a challenging period that had seen a drop in earnings but was optimistic about future growth heading towards 2022.

Fast forward to 8 July and an almost 10% share price drop in a day wiped $138 million off its market capitalisation. The culprit for this drop was lower than anticipated occupancy rates across its 502 Australian childcare centres, conditions that are not expected to improve until later this year.

G8 Education is trading at $2.68 per share (at time of writing), with some analysts suggesting this is the time to buy. There's also a fully franked dividend on offer at 14.5 cents per share (6.74% dividend yield) to entice investors; however, the dividend yield has been declining since 2016 when it was paying 24 cents per share.

The outlook for the childcare sector

Australian birthrates were slightly down in 2017 from a record number of 311,104 registered births in 2016, which may not be a major concern. However, coupled with an annual cut of 30,000 to the permanent migration cap we could see some challenges to occupancy rates down the road. The ongoing federal government subsidies to the sector can help to stabilise earnings while the company navigates some short-term headwinds.

A note on childcare services and consumer behaviour

Corporate fundamentals and brand are not necessarily front of mind when selecting a childcare service. These decisions can be very personal and hyper local. Good services gain reputation by word of mouth and you'll often see requests on local social media groups for local recommendations.

The key questions for parents will focus around quality of facilities and staff, staff turnover and cost. Having said that, these things become less important in areas of super high demand and low supply. If you're a mega supplier like G8 Education, you'll need to understand local issues, you'll need to meet and exceed the demands of the regulated quality frameworks and you'll need some geographical foresight when acquiring new centres in high demand areas. These are the keys to getting those occupancy rates in the high zone.

Motley Fool contributor JWoodward 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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