Eureka Correspondence

G8 Education, Commonwealth Bank's share offer and Inside Line.

G8 Education: Lease expiry dates

I am trying to understand how you or anyone can provide a recommendation, a forecast, and most of all a valuation on a company like G8 Education (ASX GEM) without detailed information on lease expiries for the centres it operates.

It can only operate any given childcare centre for the duration of the lease or any extension approved by the landlord.

Nowhere do I see any details of this crucial factor. Historically, GEM has been paying a factor of 4 times nett income for these leases, but what are the lease terms?  Do you know? Does anyone? Comment, please. You are recommending this company as a buy, so I feel sure you must have the answer to this vital question.


James Samson’s response: Thanks for your letter. GEM's weighted average lease expiry is 19 years across its childcare portfolio... a term we deem as quite stable and one that provides a good level of security. Terms vary depending on the property, but there is generally a mix of CPI, and market reviews to rental prices. I looked at this in detail a couple of times and am quite comfortable that GEM do not purchase centres without long term leases, and a degree of certainty in the business operations from this perspective.

As an aside, some of GEM's centres are owned by REITs such as Arena REIT (ARF) which specialises in childcare centres and health care operations. I think this is probably a trend that will increase... that is corporate ownership of the properties in the form of REITS and property investment companies.

G8 Education: Share price moves

I note that GEM is recommended as one of the shares in the dividend fund - shares in which I understand are expected to give good long term dividends and at the same time at least hold their value, if not increase in price. But I note also that GEM appears to be in a fairly long term downtrend, starting about last September. Do you expect the slide to be arrested in the near future, or even turned around?


James Samson’s response: Thanks for your letter. I have followed GEM for a long time, from $1 or so, up through $5.50 and back down again to where the price currently sits. Through this the model hasn't changed all that much. My belief is that the market is factoring in more risk than is warranted, largely due to the stigma associated with the business (being child care operations), and question marks regarding the aggression of the expansion to date. In addition, there has been a general PE down rating for these roll up models, including GXL, SGH and others.

In terms of the share price slide being arrested, I can't put my finger on a precise moment things will turn, but I do believe there is significant upside value to this business in the long term. I believe that my valuation is conservative at $4.65. That said, it may take some time to realise it. In the meantime, GEM has announced another 6 cent quarterly dividend and we are happy to continue to take the yield.

My view on the shorter term is that there is still a large portion of the company's issued capital that is held for short selling. Until this unwinds, the share price may be stunted in terms of near term growth.

Commonwealth Bank's share offer

I refer to this extract from James Kirby (see CBA in focus for bargain-hunters, August 31): "On a very rough calculation if you had about $10,000 worth of CBA stock then you will only be entitled to about 130 shares – each of those shares can be bought under the rights programme at $71.50 giving a gain on each share of about $7.00 (on the August 11 price) but only about $3.20 on the price today "

On my calculation if you had $10000 worth of CBA stock you will only be entitled to about 6 new shares. Please explain your calculation.


Managing editor James Kirby’s response: Thanks for your letter - yes the answer is 6 shares only I'm afraid, I should have elaborated further in my original answer - in the text below I've expanded the answer and spelt it all out.

On a very rough calculation if you had about $10,000 worth of CBA stock then you will only be entitled to HAVE about 130 shares PARTICIPATING IN THE OFFER – each of those shares FROM THE OFFER (IN THIS CASE 130 DIVIDED BY 23 - WHICH IS 6 )  can be bought under the rights programme at $71.50 giving a gain on each share of about $7.00 (on the August 11 price) but only about $3.20 on the price today (Monday August 31).

Inside Line

I have just watched the most recent video of Alan Kohler and James Kirby chatting. I generally enjoy these videos and find them somewhat useful however I have just realised why I don't rate them as "10"s. And that is because James interrupts Alan so much and changes topic that Alan's responses are effectively cut off and often go nowhere. I like the down to earth manner in which these chats are held however the object surely is to communicate something of real use to your subscribers.

I'm no expert in media and communications and in fairness this could be deliberately done due to the need to keep these sessions short and sweet. Maybe that is part of the problem. Maybe if they planned to go for 5 or 6 minutes more, thoughts and observations could be more fully fleshed out.

Please accept this as attempted constructive criticism.


Managing editor James Kirby’s response: Thanks for your letter. Constructive criticism is always welcome! Yes I do interrupt as you say, but the idea is to cover several topics in a short - 15mins max - space of time. We might get Alan to simply monologue to the camera but he'd probably find it hard to keep his train of thought - this format has worked well and is popular, but I take your point and will try and develop ideas better in the future.

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