GEM
However ordinary the sector (childcare) G8 Education is at least getting the message about capex, supply, and cashflow management.
Ex-COVID (which is a 2yr nightmare for managing placements) cashflow from operations is generally a) rising and b) solid enough.
If the operational cashflows are not all eaten by relentlessly adding new centres, FCF should/could lift a lot.
The other key essentials – having attractive centres (high quality standards, and staff retention) are also either lifting or solid. There is no other way to get occupancy (sustainably) up.
So, that’s the business, and they are doing a pretty good job, all things considered…
Price rises of ~10% (6% at the start, 3.5% now) should make for a solid enough inflation hedge, and there is that rare mix of bipartisan support / government support for the sector (essential services).
So, as a deep, deep value play, it’s not a bad idea.
The issue remains one of generating enough cash to dent the debt after lease expense. No point quoting 1x EBITDA if the real constraint is 3x that. And, should we have a period of stability (weather, omicron) that should be able to recommence de-gearing.
Very simplistically, an essential services sector with government support in a non-discretionary product “should”, in my view, trade at 6x EV/EBITDA. Here, we are at 4.48x cyclically depressed earnings. Anyway, not for the faint of heart, not without obvious visible issues.
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