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More Fun In The Sandpit

Weekly Reports | Jun 26 2020

This story features MAYFIELD CHILDCARE LIMITED, and other companies. For more info SHARE ANALYSIS: MFD

By Tim Boreham, Editor, The New Criterion

More fun in the sandpit for childcare operators as the kids – and the old subsidies – return

Everyone loves the notion of something for nothing – especially if the government is footing the bill – but for the childcare operators the hastily implemented “free” system during the virus crisis has fallen well short of a socialist paradise.

Put another way, the emergency measure may have assisted some parents but was less than helpful for many centres, such as those maintaining high occupancies.

The initiative meant that centres were subsidised 50% of their usual level of funding and can avail of the JobKeeper program. But they could not charge fees.

Now, many operators are cheering the re-implementation of the old Child Care Subsidy (CCS) system, which applies from July 13.

The JobKeeper subsidy for the sector will also cease on July 20. Offsetting this, the providers will receive a ‘transition payment’, equal to 25% of a centre’s pre-coronavirus fee levels.

“We believe the shift back to the CCS will be a lot more favourable for operators compared to the current relief package, particularly if attendance levels bounce back to pre COVID-19 levels,” broker Cannacord Genuity says.

In opting to remove the free scheme early, the federal government noted that occupancies had returned to 74% of pre pandemic levels. Without elaborating, education minister Dan Tehan also noted that the scheme had created “challenges” for the sector.

The question now is how quickly kids will return to the sand pit.

“Activity has started to pick up,” says Mayfield Childcare ((MFD)) CEO Dean Clarke. “All the operators are experiencing a similar environment, it’s been quite consistent.”

The ultimate truth lies in how well employment holds up after the overall JobKeeper scheme is removed at the end of September (if it’s not extended). Another variable is how many recent clients withdraw their children because the service is no longer free.

G8 Education ((GEM)), the biggest listed operator and the second biggest overall behind the not-for-profit Goodstart, reckons it will be in “no worse a position” under the transitional measures, which include relaxing the old activity test.

Combined with the CCS, the transitional measures give provide “greater flexibility to increase bookings and attendances by removing he cap on revenues imposed by the prior relief arrangements.”

At its AGM this month G8 Childcare reported “booked occupancy” at 65%, with physical attendance at only 53% as some parents still chose to keep their kids at home. However that’s a big improvement on the 30% occupancy in April and 20% in May.

Child care centres are allowed charge for 42 days of government subsidised absences, but this allowance was increased by 20 days during the crisis.

“Booked occupancy is expected to be impacted by various factors, including the reintroduction of parent co-payments under the CCS arrangements, students returning to school, parents returning to work and unemployment rates,” the company says.

“However the gap between booked occupancy and attendance levels is expected to continue to narrow.”

On a more cautionary note, G8 has intends to write down the value of its assets – mainly the goodwill on acquired centres – by a hefty $230-250 million.

According to broker RBS, this non-cash item reflects a “realistic assessment” that G8’s occupancies will not snap back to pre COIVD-19 levels of 75%, “nor will it soon return to G8’s peak occupancy of 85% in 2013-14.”

The operator of 70 centres, Think Childcare ((TNK)) on June 11 disclosed booked occupancies of 74% and attendance of 64% – higher than February (pre-virus) levels of 68% and 63% respectively.

However the company assesses “effective occupancy” at a healthy 80%, which allows for a drop off in patronage because of the free service ending and the benefit of the transition payments.

Think Childcare CEO Mathew Edwards expects childcare demand to remain “substantially intact”. After all, an average 85% of fees are subsidised by the CCS, which is means tested and slewed towards lower and middle class families.

Another reason for optimism is that the alternative free service – grandma and grandpa – has been curtailed because of the virus health risks.

Dare we say that many weary grandparents will seize the opportunity to reduce their availability permanently.

Meanwhile, Mayfield’s Clarke estimates the operator’s attendance levels fell to as low as 39%: in other words, for every 100 kids enrolled, 39 turned up.

Otherwise, occupancies fell to the “mid 60s”, compared with an average of 70% in calendar 2019. A Victorian only operator of 21 centres, Mayfield’s performance will reflect the state’s return-to-school timeline which lagged that of other jurisdictions.  

Clarke reckons the combination of the 50% government subsidy and JobKeeper meant that Mayfield was operating at break even.

“Now it’s a matter of finding out what parents will remove their kids because of the fee model,” he says.

“For us it will be only a small number.”

On Cannacord’s modeling, the transitional arrangements are favourable for a typical centre licensed for 80 children, charging $100 per kid a day and operating at 65% occupancy.

If the relief package had continued into the September quarter this hypothetical centre would have generated revenue of just over $244,000 and earnings before interest tax depreciation and amortisation (ebitda) of $9,600.

But the transition arrangement would generate revenue of $332,100, resulting in much fatter ebitda of $97,400.

For investors Cannacord prefers the dual-listed New Zealand based Evolve Education ((EVO)), which has 126 centres in COVID free Kiwiland and only ten locally.

An alternative exposure is via bricks-and-mortar childcare property trust and ASX200 index debutante Charter Hall Social Infrastructure ((CQE)), which owns 390 centres predominantly occupied by the rock-solid Goodstart.

Charter Hall’s properties in essence are fully occupied, but Cannacord forecasts a -5% fall in occupancy and a -25% rent reduction over the next three quarters.

At the time of writing shares in the childcare operators had tumbled between -43% and -21% since the late February market meltdown, with G8 faring the worst and Evolve holding up the best.

Given childcare’s status as a genuine essential service and a non-discretionary purchase for dual income households, the pull-back may be an opportunity for investors to enter what looked like an overheated sector a year ago.

G8, we add, has improved its heavily geared balance sheet with a $300 million rights raising.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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