G8 Education (GEM) 70c

G8 Education shares were hammered yesterday, falling as much as 18%,  the sharpest single-day fall since COVID first rattled the market in March 2020. The sell-off followed a downgrade to full-year earnings guidance, with management now expecting FY25 EBIT in the range of $91m–$98m, well below the prior $115m guide and consensus expectations of ~$111m. (GEM are December year-end)

The downgrade has pushed GEM’s valuation to a post-listing low: the stock now trades at ~7x forward earnings and carries a consensus fully franked dividend yield of 7.7%. With a market cap of just $540m, it’s fair to say sentiment has capitulated.

Yesterday’s update confirmed the operating environment remains very difficult:

• Cost-of-living pressures are weighing on family demand.
• Enquiry levels are tracking down YoY.
• The sector’s ongoing regulatory and staffing challenges are proving stubborn.
• The company is still dealing with reputational fallout from recent child-safety incidents.

G8 has committed to installing CCTV across its ~400 centres from 2026 onwards, a meaningful cost and logistics burden, with the added complexity of privacy and data-management obligations. It’s also not helpful for retention in a labour-challenged industry.

The update yesterday was particularly poor given the progress made during FY24. As we wrote following their results in February 25, GEM had addressed many of the lingering issues, ultimately reporting a solid scorecard, with underlying earnings growth of 14.2%. We tempered our view by highlighting occupancy remains the key for GEM, and at ~70% in FY24, it’s still too low in our view. While we appreciate tough trading conditions across the sector as affordability impacted families, the market is currently forecasting earnings growth here of 8-10% in FY25 driving an expected 15% increase in the dividend. Trading to start FY25 does not support that trajectory with ‘spot’ occupancy running at 61.8%, 3.5 percentage points lower than the same time last year.

Also, the update confirmed YTD occupancy was running at just 65%, 4.1% lower than the same time last year. Adding further risk, G8 also carries ~$800m in debt, and for a company operating in a relatively cyclical, labour-intensive industry that’s subject to regulatory shifts, the balance sheet is sub-optimal.

With the share price decimated, GEM screens as deep value, and we did explore whether this fits the profile for takeover interest in today’s note. But even with the stock this cheap, we struggle to see private equity getting interested; we view the debt as too high as a starting point.

• We have owned the stock in the past within the Income Portfolio, expecting an ongoing turnaround after a lean few years; however, while green shoots came through in FY24, they’ve been snuffed out in FY25. We wouldn’t be surprised to see them cut the dividend at their FY results.