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ASX childcare shares unlikely to receive support beyond June

The federal government’s early childhood education and care relief package helped ASX childcare shares stay afloat at the height of the COVID-19 pandemic. However, as restrictions ease and Australians begin to go back to work, the free childcare scheme is unlikely to be extended beyond its expiry date of 28 June 2020.

What is the free childcare scheme?

In early April, the federal government pledged to support parents and childcare centres across the country by announcing that childcare would become free for parents who continue to work during the coronavirus pandemic.

Additionally, the government announced it would provide financial support to childcare centres to ensure they continue to operate. As a result, the government has been paying childcare businesses 50% of their pre-COVID-19 revenue in the form of weekly ‘business continuity payments’.

The scheme was no doubt a big relief to the many parents trying to balance both working at home and parenting at the same time. It has also been vital for many others such as nurses and doctors that have been required to leave their children in the care of others when they go to work.

The announcement put a rocket under ASX childcare shares like G8 Education Ltd (ASX: GEM) and Think Childcare Ltd (ASX: TNK) at the time. However, following the initial boost, both shares remain relatively flat over the past month. G8 Education even tapped the market for capital in April to provide liquidity and strengthen its balance sheet.

New report hails scheme as a success

A report into the free childcare scheme has just been released by the Federal Education Department. The report was produced at the height of the pandemic and involved a survey of more than 7,000 child care providers.

According to ABC News, the report concluded that the scheme fulfilled its aim of rescuing the sector and keeping services viable and open. It found that 86% of childcare services credited the scheme with helping them stay open, while 76% said the scheme helped them stay financially viable. The report also said that current childcare levels remain well below capacity at 63%.

As quoted by ABC News, Education Minister Dan Tehan said:

It is positive to see a report card like this but we cannot rest on our laurels because as demand continues to increase we’ve got to ensure that the sector will survive and flourish in a post pandemic world.

Speaking to the Sydney Morning Herald, Mr Tehan further commented on the sustainability of the scheme:

The success of the rescue package and the success we have had in flattening the curve means we do have to look at how long we want this temporary measure in place and how quickly do we need to change to meet the growing demand.

What next?

The current scheme is due to expire on 28 June 2020. While no final decision in regard to an extension has been made yet, Prime Minister Scott Morrison recently highlighted the temporary nature of the scheme. On Friday, Scott Morrison said that although the Education Minister is considering the program beyond its current expiry, it was “not a sustainable model for how the childcare sector should work”.

As for ASX childcare shares, it will continue to be a tough road ahead as COVID-19 has had a significant adverse impact on occupancy levels across the sector. G8 Education and Think Childcare also carry a meaningful amount of debt to be serviced.

Although G8 Education’s recent $301 million equity raising helped to substantially shore up its balance sheet, it is still in a net debt position of $65 million on an adjusted basis. The much smaller Think Childcare had around $30 million of net debt as of FY19 (ending 31 December 2019).

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Motley Fool contributor Cathryn Goh 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.