Upside For G8 Education

This story features G8 EDUCATION LIMITED. For more info SHARE ANALYSIS: GEM

Bottom Line 27/10/15

Daily Trend: Up
Weekly Trend: Down
Monthly Trend: Down
Support levels: $2.86 / $2.78 / $2.40
Resistance levels: $3.08 / $3.64 / $4.15

Technical Discussion

G8 Education ((GEM)) provides childcare services and has been focusing on acquiring competition over recent years. In 2013 the company acquired Mary Poppins and Peppercorn as well as almost 30 other child care and education centres.  In March the company announced it had completed the acquisition of several companies which formed part of the Sterling Early Education group. For the six months ending the 30th of June 2015 revenues increased 63% to A$305.7M. Net income increased 73% to A$28.2M. Revenues reveal an Australia segment increase of 68% to A$304.8M.  Broker consensus is “Buy”. Dividend yield is currently 6.3%.
 
Reasons to remain bullish longer term:
→ There is still room to grow via acquisitions.
→ Regulatory uncertainty has eased due to the Prime Minister’s recent comments.
→ 20 child care centres costing $38.m have recently been purchased.
→ A placement raising $100m will be used for the purchase with the remainder offering balance sheet flexibility.
→ The federal government is supporting the industry over the next four years with hard dollars.
→ The longer term trend remains strong.

During the last couple of reviews we’ve been concentrating on the zone of support as well as a falling wedge.  In fact we had two falling wedges in position in late September although the smaller pattern has had to be re-drawn.  Perhaps not ideal but the basic structure remains firmly in place and it’s still as significant now as it was a few weeks ago.  The bottom line though is that the upper boundary needs to be overcome which thus far appears to be in the “too hard basket ”.  On the positive side of things price is still posturing in the right area meaning the bullish case is by no means off the table. 

A push up through what essentially is diagonal resistance should trigger a multi-week and even a more bullish multi-month trend to the upside.  We’ll be looking for a rotation up toward the target area as annotated around $4.50.  Let’s also not forget that with this type of pattern price normally head up to the origin of the structure in around a half to one third of the time taken by the whole corrective pattern.  In other words if some traction can be gleaned some strong impulsive price action should be the way forward which is something we definitely want to be involved with.  One thing we don’t want to see is the lower boundary of the support zone penetrated as this will put serious pressure on the patterns.  All things being equal we’d expect those slightly lower levels to remain intact basis the strong buying demand that’s been witnessed in the past.

Trading Strategy

If you’re looking for a swing trade then the bullish trigger is still the upper boundary of the falling wedge which is pretty much where price is currently sitting.  If you are aggressive then buy following a break up through the recent pivot high at $3.08 with the initial stop set at $2.86 which is a nice low risk entry.  As mentioned above, the target zone circa $4.50 should be met over the medium term with a chance of even higher levels being achieved.  A break down through the aforementioned initial stop level would be reason for concern whilst also being reason to cancel pending orders.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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