G8 Education Ltd (ASX: GEM) shares have fallen 23% for the year to date.
G8 Education is Australia's largest childcare centre operator, with over 400 early learning, kindergarten, and preschool centres across Australia under various brands.
Recently, retail investors have embraced a 'buy in the dip' mentality. In other words, they have taken advantage of share market volatility to buy shares at lower prices.
This was most evident back in April, when a record number of retail investors bought ASX stocks during the 'Liberation Day' dip. So far, this strategy appears to have paid off with the S&P/ASX 200 Index (ASX: XJO) rebounding more than 15% since then.
Does broker Macquarie Group Ltd (ASX: MQG) think this is a good strategy in the case of G8 Education shares?
Let's see.
Macquarie downgrades G8 Education
In a 2 July research note, Macquarie downgraded G8 Education shares from outperform to neutral.
The broker also cut its 12-month price target by 25% from $1.53 to $1.15. Given that shares are currently changing hands for $1.02, this suggests 13% capital appreciation over the next 12 months.
G8 Education also offers a dividend yield of 5.38%, boosting investors' total return.
When issuing this downgrade, the broker said:
We are positive on GEM's CY26 outlook, but cautious on CY25 given 1) sluggish occupancy trends, and 2) the Creative Garden Point Cook incident. The incident will likely be an overhang on GEM until visibility improves concerning investigation outcomes and potential impacts.
Macquarie reduced its CY25E occupancy forecast to 65.0% (from 65.7%), citing reduced growth expectations. Looking further out, the broker cut its forecast for CY26/27E occupancy to 70.5%/71.0% (down from 71.4%/71.9%). The broker said it still expects the abolishment of the activity test on 1 January 2026 to be a material tailwind for CY26 occupancy.
Macquarie also referenced the Creative Garden Point Cook incident when issuing its ratings change.
This week, it was reported that a man had been arrested and charged with offences relating to children placed at the Creative Garden Point Cook childcare centre. The man in question had been employed by G8 Education between October 2021 and February 2024.
According to Macquarie, "There is high uncertainty concerning the quantum of potential reputational or financial impacts the incident could create."
Other risks cited by the broker included softer macro driving weaker occupancy trends, mandated wage increases with little to no government subsidisation, cost inflation exceeding above their forecasts, and inability to exit underperforming centres.
What could investors buy instead?
Those interested in the childcare sector and concerned about G8 Education may wish to consider Embark Early Education Ltd (ASX: EVO).
Its current CEO is Chris Scott, who founded G8 Education.
The company initially listed in New Zealand, where it operated the majority of its centres. After failing to bounce back from the pandemic in 2022, it sold its NZ centres (around 100), re-domiciled to Australia, and listed on the ASX. This was done via a "scheme of arrangement", meaning no initial public offering (IPO) road show.
For this reason, as well as its market capitalisation of $128 million, it has largely flown under investors' radar.
Over the past couple of years, it has been ramping up acquisitions throughout Australia. In May, the company announced it had acquired 2 new centres, bringing its total number of childcare centres to 40.
It also offers a dividend yield of 8.57%, which is likely to be very attractive to passive income-oriented investors.
Embark Early Education could be an attractive alternative to G8 Education shares.
