G8 Education punished after chalking up profit fall amid fees shake-up

G8 Education shares have tumbled after it chalked up a drop in first-half net profit amid a childcare funding shake-up.

A G8 Education childcare centre in Caboolture.

Childcare centre operator G8 Education has delivered a 22 per cent fall in first half net profit to $23.7 million as it adapts to changes in the sector.

Shares in G8 Education plunged nearly 14 per cent in early trade after the childcare centre operator booked a 22 per cent fall in first half net profit to $23.7 million, as it adapts to changes in the sector.

It comes after the company warned of slower occupancy growth in February when it announced its full year result.

G8 (GEM), Australia’s second-largest childcare centres operator, booked an earnings before interest and tax down 21.2 per cent to $48.1m.

That was about 6 per cent below what analysts at RBC Capital Markets had estimated, who said consensus earnings downgrades are likely.

The company declared an interim dividend of 4.5 cents per share fully franked.

Revenue grew 7.6 per cent to $396.4m driven by fee increases, acquisitions and new centre openings.

Seven new centres were completed during the half, with around 12 more to be completed in the second half and 16 expected to be completed in 2019.

In its first-half update today, the company said occupancy growth in July and August is encouraging and demand is expected to improve as a result of the new childcare subsidy.

“The focus this half was successfully transitioning to the Jobs for Families Child Care Package, the biggest change to the industry in recent times, as well as focusing on operational efficiencies and investing in our people, systems and technology in line with our strategic growth initiatives,” managing director Gary Carroll said.

He said that while like-for-like occupancy was down, recent data has shown signs of improvement.

“Looking forward, G8 is very strongly positioned to leverage its scale and reinforce its competitive market position through a successful balance sheet refinancing, high earnings cash conversion of 99 per cent, the impact of the new Child Care Subsidy which is expected to stimulate demand through improved affordability, and transformational initiatives designed to provide a differentiated offer and experience to families and team members.”

Still, G8 said it is not expecting a material improvement in market conditions until mid to late 2019, due to supply conditions and regulatory change.

“The admission that material improvement is not expected until mid-late CY19 translates to likely consensus earnings downgrades,” said RBC analyst Garry Sherriff.

“Debt refinancing should be welcomed by the market to allay concerns around a possible equity injection, but the slow turnaround in market conditions is likely below market expectations with management not forecasting a material improvement in market conditions until mid to late 2019.”

In July, the company increased fees by 5.5 per cent from and increased wages by 3.5 per cent.

G8 said it would continue to invest in improving quality and driving initiatives which are expected to improve occupancy in 2019.

The incremental cost of those investments is forecast to be $5m in the second half, while the drag on earnings from set-up costs relating to greenfield centres is expected to be $2m in the period.

At 11.46am (AEST), G8 Education shares were down 34.5 cents, or 14.26 per cent, at $2.075.