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Why Evolve Education shares are on watch today

Evolve Education Group Ltd (ASX: EVO) shares fell over 6% in morning trade following their return to the boards after a 2-day trading halt. The Evolve Education share price has now bounced back to $0.145, its pre-halt closing price, but will be on watch during the rest of today’s trade.

The childcare provider entered the trading halt on Wednesday to raise fresh capital via a $18.9 million placement. Capital was earmarked to help pay for its expansion and pay down debt. 

What are the details of the capital raising?

Evolve issued 145 million new shares at an issue price of 13 cents per share, a 10.3% discount to the closing price of Evolve’s shares on 10 December. Managing Director and 19% shareholder Chris Scott subscribed for $3.3 million in shares, while entities associated with CEO Timothy Wong subscribed for $4 million in shares. 

Proceeds will be used to pay down bank debt, fund the acquisition of 5 childcare centres in the Australian Capital Territory (ACT), and provide increased flexibility to implement the New Zealand turnaround and Australian expansion strategy. The ACT acquisition was announced on Monday. Costing $12.03 million, it will give the group a total license capacity of 461 children per day. Settlement is expected to occur at the end of March 2020.

How has Evolve been performing in 2019?

Evolve has been on an acquisition spree in Australia over the last few months. In late November, Evolve completed the acquisition of 5 childcare centres with a combined licence capacity of 456 children across Queensland and Victoria. The transaction cost Evolve $7.65 million upfront with a further $1.5 million deferred subject to certain conditions. 

On 14 October, Evolve completed the acquisition of a childcare centre in Melbourne with a total licence capacity of 126 children per day for $2.45 million. On 8 October, Evolve completed the acquisition of 4 childcare centres in Melbourne with a combined licence capacity of 384 children per day. The transaction cost $11.8 million, funded from cash reserves, and is expected to contribute $10.8 million in annualised revenue to Evolve. 

In New Zealand, Evolve runs 126 childcare centres but has faced difficult conditions with occupancy rates declining to 72% in early October. Revenue in the 6 months to 30 September 2019 declined 14% to $68.187 million, while a net loss of $1.438 million was recorded. 

A new board took charge of Evolve in September with Chris Scott installed as Managing Director. Chris Scott is the former boss of Australia’s biggest ASX-listed childcare firm G8 Education, and the biggest shareholder in Evolve. Aggressive changes were implemented including: 

  • increases to centre fees and strict control on price discounting
  • streamlining of support office functions to deliver annualised savings of $3.4 million
  • a reduction in board fees of 16.7%. 

What’s in store for 2020 and beyond?

Evolve’s strategy for FY20, 21, and 22 is focused on improving occupancy rates in New Zealand and pursuing further acquisitions in Australia. Earnings before interest, tax, depreciation, and amortisation for calendar year 2020 is expected to be $10 million for New Zealand operations and $5 million from Australian operations. 

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Motley Fool contributor Kate O'Brien 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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