Tim Boreham: No kidding around in childcare centre quest
Parents aren’t the only ones completing childcare pickups, with listed centres being snapped up one by one in a series of acquisitions.
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Long coveted for their government-assisted revenues and supported by favourable demographics, the listed childcare centres are being picked off via acquisitions, one by one.
Earlier this month, the Melbourne-based Mayfield Childcare (ASX:MFD) revealed an indicative cash offer from the private Genius Education, at $1.28 a share (a circa 30 per cent premium).
Given Mayfield acquired 14 Genius Learning centres in 2021, it’s a kid-bites-dog story.
It’s also not pick-up time for the acquirer just yet: the similarly private Busy Bees Early Learning has stepped into the sandpit with a tentative, $1.35-a-share counter offer.
Busy Bees have been – well – busy bees, having last year subsumed the listed Think Education at a generous 170 per cent premium.
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The operator of 21 Melbourne centres, Mayfield is busily chatting to both parties – and anyone else lurking behind the finger-painting easels.
Over the last decade, childcare centres have been a popular investment for small-time operators and an even better one for the corporate players who have led the consolidation in a still-fragmented sector.
Profitability hasn’t been crimped by the dominance of not-for-profit operators, notably Goodstart (which acquired the centres of Eddy Groves’ collapsed ABC Learning).
In November, federal parliament passed Labor’s promised measure to extend the childcare rebate to more families – 1.2 million of them – on struggle-street incomes of up to, er, $530,000 a year.
Assuming Mayfield is taken out, the larger G8 Education (ASX:GEM) and the Kiwi-based, dual-listed Embark Education (ASX:EVO) will be the only ASX exemplars.
G8’s trading update this month pointed to a 5 per cent decline in net operating profit for the year to date - $41 million as of the end of November – and steady occupancy.
The company has been able to absorb an 8 per cent increase in wages – half from actual salary rises and half from increased use of agency staff.
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Headed by former G8 chief Chris Scott and formerly known as Evolve Education, Embark is in the throes of selling its circa 100 NZ childcare centres to private equity, for around $43m. The company reckons there are better prospects in Australia and plans to bolster its current complement of 24 local centres.
An alternative gambit is to invest in childcare landlords, who benefit from steady rental income and long lease durations without the hassle of cleaning up the Lego and the vomit. Take the listed real estate investment trust Arena REIT (ASX:ARF), which holds 263 “social infrastructure” properties – 252 of them childcare centres.
Arena doesn’t seem to be suffering too much from the Reserve Bank’s stiff medicine – so far at least.
In the year to June 2022, Arena increased net operating profit by 8 per cent to $56 million, with the value of its childcare portfolio increasing 24 per cent to $1.28 billion.
Management flags a current-year distribution of 16.8c per security, up 5 per cent and chirps: “Operator occupancy remains robust and higher than any other prior corresponding period over the past six years.”
Having acquired the Folkestone Education Trust in 2018, Charter Hall Social Infrastructure REIT (ASX:CQE) owns 364 childcare centres valued at $1.64bn.
About 85 per cent of its rent revenue derives from early learning centres, notably from tenants Goodstart and G8 Education.
The fund last year boosted operating earnings by 8 per cent (to $62.9 million) and also increased the value of its portfolio by 19 per cent, or $269 million.
Despite their apparent robust earnings outlook, Arena and Charter Hall have lost 15 per cent and nine per cent per of their value this year, respectively.
The sell-off reflects the heightened cost of funding risks, but if things get gnarly there will be more bargain assets available to buy.
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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Originally published as Tim Boreham: No kidding around in childcare centre quest
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