Childcare group has gr8 run but stop-loss will protect gains

The collapse of childcare centre operator ABC Learning during the global financial crisis and the sale of many of its centres to non-profit operators hit investor confidence in the sector and had many wondering whether it was a suitable place for commercial operators.

The collapse of childcare centre operator ABC Learning during the global financial crisis and the sale of many of its centres to non-profit operators hit investor confidence in the sector and had many wondering whether it was a suitable place for commercial operators.

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.

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