Is A Supply Issue Emerging In Child Care?

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

Canaccord Genuity considers the increase in new child care places is unlikely to threaten the established businesses of the listed child care operators.

-Pockets of under supply still exist despite increase in new centres
-Location of new centres largely reflecting greatest demand
-Little impact envisaged on G8 Education, Think Childcare 

By Eva Brocklehurst

Is there a supply issue emerging in child care places? In the June quarter 54 new child care centres were opened compared with 70 in the March quarter.  The number opened in the first half of 2016 rises to 124, versus the 111 that were opened in the prior comparable half.

Canaccord Genuity estimates the market requires around 200 new centres to meet the overall increase in child care usage and based on recent data, estimates more than 250 new centres will be opened in 2016.

Hence, there appears to be an excess of new supply versus demand, but while there is potential for over supply, the broker expects this to be limited to specific areas. Moreover, anecdotal evidence suggests that in areas where there is a supply shortage the appropriate needs analysis is being conducted and the new centres largely reflect these demographics. All up, the broker suggests pockets of under supply will also continue to exist.

Drilling down through the data shows Victoria represented 37% of the new centres opened in the June quarter, while NSW and Victoria combined at 70%. New centres are observed to be getting larger, driven by the cost of land and the scalability of a larger centre.  NSW is the exception, particularly in Sydney where centres are generally smaller because of the cost of land in the inner city suburbs as well as being dependent on land availability.

The ratio of centres to population suggests that in the majority of cases the new places are in areas to reflect the need. Around 54% of the new centres in the June quarter were in areas where the ratio of the population of 0-4 year olds to licensed child care places (P2P) was greater than three times.

Therefore, Canaccord Genuity does not envisage the new centres are a major risk to occupancy for either G8 Education ((GEM)) or Think Childcare ((TNK)). Of the 54 centres opened in the June quarter, six were within two kilometres of a G8 Education centre and none within the same vicinity of a Think Childcare centre. Of the six within the 2km reach of the G8 centres, these were in areas where the P2P ratio is greater than 2.5.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating for both stocks. The G8 Education target is $4.94 and Think Childcare $1.56. FNArena's database has three Buy ratings and one Hold for G8 Education with a consensus target of $4.11, suggesting 9.1% upside to the last share price. Morgans retains an Add rating and $1.63 target for Think Childcare.
 

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