G8 – which runs 500 daycare centres across the country including under the Headstart, Sandcastles, Jellybeans and Bambino’s banners – slashed guidance for underlying earnings before interest and tax this calendar year from between $140 million and $145 million to between $131 million and $134 million. The company made $136 million in EBIT last year.
Morgan Stanley analyst James Bales said that after the “disappointing” trading update G8’s dividends could be at risk and that the company may even need to raise fresh equity if earnings come under more pressure next year.
“Despite the messages of more rational development pipelines, older and more marginal centres appear be to keeping the doors open limiting occupancy improvement,” Mr Bales said.
“This more muted recovery clearly has a price impact in some catchments too.”
Canaccord Genuity analyst Aaron Muller also said that G8’s downgrade would likely result in concerns being raised about its balance sheet and debt levels. At around 2.4 times earnings, Mr Muller said G8’s leverage was at a “comfortable level” but high enough to weigh on investor sentiment.
“We believe industry conditions are on the improve and [G8’s] greenfield investment will underpin earnings growth going forward,” Mr Muller said in a note to clients said.
However, “short-term earnings uncertainty thanks to the string of downgrades and investors’ concerns around the balance sheet are likely to weigh on the stock in the near term.”
UBS analyst Tim Plumbe said that was a relatively cheap share price, G8 could offer long-term value for investors, as it improves underperforming centres, as supply and demand rebalance and its portfolio of new “greenfield” sites mature.
“That said, given the consistent headwinds, we prefer to see tangible momentum in the strategy before getting more excited,” Mr Plumbe said.
G8 told investors that the glut of new centres was easing, with national day care supply growing at 3.7 per cent in the year to date, compared to 4.3 per cent last year.
G8 also announced last week it had sold 25 of its 66 centres in WA, and that eight more would closed, bringing the number of centres shuttered this year to 16. The company also pushed back the development of 10 new centres to next year.
G8’s shares closed at $1.99 on Friday, which was down from $2.59 on Wednesday and the lowest they have traded since December last year.
The stock has delivered total negative shareholder returns of 25 per cent over the past year, and has underperformed the ASX200 by 73 per cent over the past three years.
Business reporter at The Age and Sydney Morning Herald.