It’s no surprise that the ASX childcare sector is experiencing a tough market dynamic created by the coronavirus crisis.
Think Childcare Ltd (ASX: TNK) and G8 Education Ltd (ASX: GEM) have seen their share prices plummet in March. In fact, the G8 Education share price at one point was down a whopping 74% from its February high of $1.84.
If occupancy levels drop significantly, these ASX childcare shares will struggle to pay their huge lease liabilities, with G8 Education and Think Childcare also carrying significant debt to be serviced.
However, thanks to the Federal Government’s announcement to support childcare centres across the country, these shares have bounced back recently. G8 Education was one of the standout performers of the S&P/ASX 200 Index (ASX: XJO) last week.
However, this announcement won’t be enough to see G8 through the uncertainty ahead. G8 entered a trading halt shortly after the government announcement on 2 April, with management today announcing details of an equity raising to help the company survive through this coronavirus pandemic.
What did G8 Education announce?
G8 is undertaking a number of capital structure initiatives to help it survive. The company’s lease syndicates have agreed to two periods of covenant relief for its debt facilities and G8 has temporarily suspended dividends. Additionally, the ASX childcare share announced an equity raising this morning.
G8 plans to raise approximately $301 million through a fully underwritten equity raising. This is to consist of an institutional placement of $134 million and a 1 for 2.2 pro-rata accelerated non-renounceable entitlement offer of approximately $167 million. The latter comprises approximately $89 million offered for institutions and $79 million for retail investors.
Investors will be able to purchase new shares at a fixed price of $0.80 per share. This represents a discount of 25.9% to G8’s last traded share price of $1.08. The equity raising will create approximately 377 million new shares.
Proceeds from the equity raising are to be used to provide liquidity and strengthen G8’s balance sheet. Accordingly, adjusted net debt will reduce to $65 million and the adjusted leverage ratio will drop from 2.3x to 0.4x.
What does this mean for G8 Education shareholders?
The retail component aims to raise approximately $79 million, with eligible shareholders (those who already own shares) offered to purchase 1 new share for every 2.2 shares they already own.
These new shares can be purchased at 80 cents each, with the right to do so being non-renounceable, meaning the right cannot be sold or transferred.
The ‘accelerated’ offer means that institutional shareholders are to deal with their rights prior to retail investors. The institutional offer will close today and trading of G8 shares will resume after the long weekend on Tuesday on an ex-entitlement basis. This means any G8 shares bought on Tuesday or after will not carry the rights to participate in the equity raising.
The retail offer opens for shareholders on 20 April 2020 and closes on 1 May 2020, with normal trading of new shares on 11 May 2020.
Additionally, G8 Education today announced that Federal and State Government support through the JobKeeper package and State-based packages will enable centres to remain open and keep team members employed. This comes after the Government’s announcement to provide support for childcare centres to ensure they continue to operate, with childcare and early education being critical.
Despite the centres remaining open, the coronavirus outbreak is to have a significant adverse impact on occupancy levels. As parents withhold children from attending centres, G8’s like-for-like occupancy has dropped, tracking 9.7% lower than the prior year.
In response, G8 has commenced initiatives to preserve cash and improve efficiency through the period. This includes optimised rostering, wage level management, negotiation with landlords and reduction/deferral of non-essential capital and operating expenditure. In regard to the latter, annual capital expenditure has been reduced from $40 million to $25 million.
It will be a tough road ahead for ASX shares in the childcare sector. I wouldn’t be surprised to see more follow G8’s lead in raising capital to survive these market conditions, using the extra cash to service debt and strengthen the balance sheet.
It may come down to how long these conditions continue, with G8 noting that it expects coronavirus-impacted trading conditions to continue for at least the next 6 months.
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