G8 shares plummet on full-year result

The childcare operator plunged close to 30pc during the session as half-year profit sharply disappointed.

CLSA analyst Shaun Weick said G8’s results this half were “a big miss”. Picture: Mark Dadswell.

Shares in childcare operator G8 Education (GEM) plunged as much as 29 per cent in intraday trade on Tuesday after the company revealed an unexpectedly weak profit.

But a ballooning pile of debt for the company may be a bigger issue than the sharp share price fall, with G8’s leverage increasing well above the group’s targeted ratio following a period of rapid expansion and a string of acquisitions, including a recent failed attempt at a hostile takeover of rival Affinity Education which coincided with chairman Jenny Hutson’s resignation last October.

G8 on Tuesday booked a profit of $24.9 million for the six months through June, a slide of 12 per cent on the same period a year earlier, despite an 18 per cent rise in revenue, which hit $358m during the period.

At 2.30pm G8 shares were trading down more than 12 per cent at $3.24.

The now $1.2 billion G8 Education has grown its business from 77 childcare centres in 2010 to 478 at the end of June, making it Australia’s largest childcare operator. Over the last six months the group added nine centres to its portfolio and is expecting to settle a further 12 in the second half of this year. Along with 20 centres in Singapore, the group has total licenced childcare places of 37,045. However, G8 does not publish the utilisation rates for these places and since peaking in late 2014, G8 shares have lost around 40 per cent of their value.

At the group’s annual general meeting last May, Ms Hutson, who has stressed her departure from the group was unrelated to the failed $185 million takeover of Affinity, sought to hose down concerns that G8 could meet the same fate as the failed ABC Learning, which had also pursued an aggressive expansion strategy.

CLSA analyst Shaun Weick said this half’s results were “a big miss”. G8’s adjusted net income came in $7.5m below consensus expectations, while revenue was $15.6m below expectations.

Mr Wieck said G8’s net debt, which increased to $356m from $321m over the last six months, meant the group’s leverage ratio was now sitting at 2.3 times — well above management’s targeted ratio of 2.1 times — at a time when earnings growth appears to face headwinds.

“Specific earnings guidance for the full year was not given, but based on commentary provided, earnings growth may be subdued by increasing wage, training and refurbishment costs,” he said, warning the group was likely to downgrade its guidance for this year and the next as a result.

G8’s earnings margin had been negatively impacted over the first half by higher wages, legal costs and investment in staff training. Financing costs also increased 30 per cent over the half.

After the resignation of Ms Hutson, G8’s long-serving chief financial officer Christopher Sacre resigned at the company’s full-year results in February. He was replaced by former Super Retail Group finance officer Gary Carroll in late July.

G8 managing director Chris Scott was upbeat on Tuesday’s results, saying the momentum “lays a solid foundation as we enter the seasonally stronger second half period”.