While we are in no rush to buy back into G8 Education just yet, their weaker trading update last week pushed the shares ~12% below the level we exited, and we’re now adding the childcare operator back on the Hitlist for the Income Portfolio. At a strategy day on the 26th of October, they provided a trading update that was softer than expected, along with a plan to sell 31 underperforming centres. They outlined weaker occupancy (-1.4% YoY for the week ending 22 Oct) versus expectations of an improving trend. However, they are doing well with costs, and they have signed a conditional agreement to offload 31 centres that are hurting returns. While this is subject to a bunch of conditions, we think it’s another incrementally positive step as they continue to turn around the business, albeit at a slower pace than we had originally hoped.
- At the time we sold the stock in August, we wrote: While we think GEM is doing a good job turning around, a lot of external challenges remain that create a higher degree of uncertainty in the near term, prompting us to cut the position.
Lower than-expected occupancy this year has led to downgrades to earnings, which is the reason for the stock falling. However, there are offsets with better cost management and a bump up in earnings if/when they sell loss-making centres, although that is hard to factor into our numbers until it happens. We will need to see improved occupancy and more clarity around asset sales before buying back into GEM, which is now trading on an Est PE of 11.3x, its cheapest multiple since COVID.
MM is now adding GEM back onto the Income Portfolio Hitlist
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