ASX Code: GEM
Security price: $3.51
Industry: Education
Forecast distribution: 24 cents per share fully franked
Childcare centre operator, G8 Education, has been a stellar performer over the past 3 years. This year, however, some of the gloss has come off the share price.
But the stock price fall has pushed up the yield towards 7 per cent — a solid option now for ­income investors.
G8 has a simple strategy: it buys childcare centres and aggregates them into the business. Brands include Community Kids, Great Beginnings, Kindy Patch and World of Learning.
Essentially the group pays a lower earnings multiple to centre owners than the multiple the stock market applies to G8 as a whole. So each buy gives the company an uplift in value.
G8 bought 203 new centres in 2014, taking its total to 437 centres in Australia and 18 in Singapore. In February it announced the acquisition of 12 more centres for $36 million.
The market has welcomed the strategy: in three years G8’s shares surged almost five fold to highs of $5.63 late last year as ­acquisitions fuelled revenue and profit growth. The company’s shares have since slipped sharply this year to as low as $3.71 and now appear to be in a downtrend.
The fall comes despite G8’s solid financial performance continuing in 2014 when revenue surged 79 per cent and under­lying net profit rose 88 per cent.
There has been some criticism of the sustainability of G8’s strategy, and concern over the Productivity Commission’s recommendations including the possibility of means testing childcare assistance and possibly funding for nannies. G8 says the proposed changes are “constructive” and it is well placed to adapt.
Demand for childcare should continue to grow with female participation in the workforce increasing. G8 still has big acquisition opportunities in a fragmented market, which should drive growth. And even if it doesn’t expand and simply focuses on operating its existing child care facilities more efficiently, it should perform well.
G8 pays a quarterly dividend. It paid out 16.5c a share in fully franked dividends in 2014. It has announced a 6c a share fully franked dividend for the quarter ending March 31 this year. It is forecast to pay out 24c a share in 2015, which gives a healthy dividend yield of 6.8 per cent.
G8 is trading below our forecast value of $4.03. Along with a 6.8 per cent dividend yield, that makes it attractive for income ­investors who are happy taking on more risk as part of a diversified portfolio.
For other attractive income options, view our full Dividend Detective Archive.