Broker reveals undervalued ASX sector with post-election tailwinds

Though not all shares in this undervalued ASX sector are a buy, according to Canaccord.

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Key points

  • ASX childcare shares are outperforming the ASX 200 today as the federal election outcome improves their outlook
  • The incoming Labor government is promising more subsidies for families, which will increase demand for childcare places
  • Canaccord is recommending investors buy G8 Education shares and Mayfield Childcare shares

There is one undervalued ASX sector that’s set to benefit from federal Labor taking government that few are thinking about.

That is the ASX-listed childcare space. Operators could see a boost to demand under an Anthony Albanese government, according to Canaccord Genuity.

Why this ASX sector is outperforming today

This probably explains why the Mayfield Childcare Ltd (ASX: MFD) share price surged 9.6% to a record high of $1.49.

The G8 Education Ltd (ASX: GEM) and Evolve Education Group Ltd (ASX: EVO) share prices are also beating the market. They are up 3.5% to $1.19 and 0.7% to $0.70, respectively, at the time of writing.

In contrast, the S&P/ASX 200 Index (ASX: XJO) lost its morning gain to trade at breakeven.

Undervalued ASX sector getting a Labor boost

Canaccord said:

The election result over the weekend should be positive for childcare demand, in our view, with childcare being one of the key policies put forward by the Labor party.

The policy is aimed at making childcare more affordable by increasing the percentage of fees covered by the government.

The new federal government plans to increase the maximum childcare subsidy to 90%. It will also increase the subsidy rate for one child in every family and households with incomes up to $530,000.

Additionally, Labor will ask the competition watchdog to design a price regulation mechanism and ask the Productivity Commission to look at ways of moving to a 90% flat subsidy for everyone.

Demand outpacing supply

Albanese is promising that around 96% of families will be better off under its plan and no family will be worse off.

It’s worth noting that demand for childcare was already growing strongly before any policy changes were announced.

Canaccord added:

We believe these [policy] changes will have a meaningful impact on demand in MarQ’22 and beyond.

Meanwhile, new supply has come on but not at the rates we have seen previously. Moreover, there has been an increase in closures.

Which ASX childcare shares to buy

But not all shares in this undervalued ASX sector are a buy, according to Canaccord.

The broker is recommending investors buy G8 shares and Mayfield Childcare shares. These shares are trading on attractive valuations and Canaccord is expecting them to post solid earnings growth in 2022.

Its 12-month price target on G8 is $1.42 a share and on Mayfield Childcare is $1.76 a share.

Canaccord is more cautious about the Evolve Education share price. While it looks cheap on a long-term basis, the broker is concerned about the performance of its New Zealand operations.

The broker rates Evolve Education as a hold with a price target of NZ$0.90 a share.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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