Childcare group has gr8 run but stop-loss will protect gains
But the recent performance of G8 Education has given doubters food for thought. The company, which listed in 2007, will soon operate 180 centres in Australia and Singapore. Its market capitalisation is $664 million (well below ABC's peak of $2.5 billion) and it has a strategy of managed growth through both acquisition and providing management for other centre owners.
Its range of services includes family day care, long day care, casual day care and holiday care. Its brands include Kindy Patch, Community Kids, Little Einstein's and Pelican Childcare.
G8 touched a low of 41¢ in October 2011. It has topped $2.40 in recent days, giving investors close to a 600 per cent return in that time as this week's chart, provided by Paul Ash, Victorian president of the Australian Technical Analysts Association, shows.
This strong run-up has been interspersed with small pull-backs and occasional sideways trajectories which, Ash says, is common for a stock in a strong uptrend. G8 went sideways between December and mid-February, then had a strong rally from $1.59 to current levels, a gain of 50 per cent.
Before that spike the stock's trajectory was underpinned by a rising support trend line. From February 15 the support line has changed to become even steeper. Smart investors, Ash says, will use this red line on the chart to protect their profits by putting stop losses in place at or just below this level.
Another sign of strength is the 30-day moving average line, which has followed the price up the steeper incline since February.
On the fundamental level there is support for the company's rising share price. Dividends have just been raised 25 per cent to 10¢ a year and underlying net profit rose 42 per cent to $19.7 million in the December year. Earnings per share rose 23 per cent and the gearing ratio, although up from 24 per cent to 32 per cent, was still relatively modest at balance date.
Since then the company has had a $35 million capital raising. It plans to spend $18.8 million on acquiring 12 centres in NSW and Victoria, leaving some cash to strengthen the balance sheet. Overall, shareholder return for five years is almost 60 per cent a year. Anyone buying in at current levels should be sure to protect their position with stop losses, as the price-equity ratio is 26.58 times.
This column is not investment advice. rodmyr@gmail.com
From next week Technical Analysis will appear in the Money section, published on Wednesdays.
Frequently Asked Questions about this Article…
G8 Education is a listed childcare centre operator (listed in 2007) that will soon operate about 180 centres across Australia and Singapore. It offers services such as family day care, long day care, casual day care and holiday care under brands including Kindy Patch, Community Kids, Little Einstein's and Pelican Childcare. The company's market capitalisation is around $664 million.
G8 shares fell to a low of 41¢ in October 2011 and have since topped $2.40 in recent days — a roughly 600% return from that low. More recently the stock rallied from $1.59 to current levels (about a 50% gain), with the run made up of strong moves interspersed with small pull-backs and periods of sideways action.
Fundamental support includes a 25% dividend increase to 10¢ a year, underlying net profit rising 42% to $19.7 million for the December year, and earnings per share up 23%. Gearing rose from 24% to 32% but was described as still relatively modest at balance date.
G8 completed a $35 million capital raising and plans to spend $18.8 million to acquire 12 centres in New South Wales and Victoria. The company's stated strategy is managed growth through both acquisitions and providing management services for other centre owners.
Technical analysts (including Paul Ash, Victorian president of the Australian Technical Analysts Association) point to a rising support trend line that became even steeper from February 15, and a 30-day moving average that has followed the price up the incline. These are seen as signs of a strong uptrend, with normal small pull-backs along the way.
The article recommends using stop losses to protect profits — specifically placing stop-loss orders at or just below the rising support trend line on the chart. This approach is suggested by technical analysts to manage downside risk after a strong run-up.
The collapse of ABC Learning during the global financial crisis and the sale of many centres to non-profits shook investor confidence in commercial childcare. The article contrasts that history with G8's more measured, managed growth, stronger recent fundamentals and much smaller market capitalisation than ABC’s peak, suggesting the sector has evolved — though investors should still be cautious.
Key figures from the article: a price-to-earnings ratio of about 26.58 times and a five-year shareholder return of almost 60% per year. The column also cautions that anyone buying at current levels should be sure to protect their position with stop losses. Note: the original piece states it is not investment advice.
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