Two emerging company darlings have raced up to record highs today on strong profit outlooks.
Childcare operator G8 Education (GEM) staged its best one-day gain in eight months when surged 5.9% to a record high of $3.49, while veterinary services and animal products retailer Greencross (GXL) jumped 4% to an all-time high of $8.95 just after lunch time.
G8's ravenous appetite for acquisitions does not look to be abating with the group announcing deals to buy 63 centres for $104.7 million. The centres will contribute $26.1 million to the group’s earnings before interest and tax on an annual basis and is likely to prompt analysts to revise up their 2014 forecasts (G8’s financial year is the same as the calendar year).
As it currently stands, consensus estimates are predicting a $25 million increase in this year’s EBIT to $76.1 million and the latest acquisition is estimated to contribute close to 70% of the increase. Management is likely to announce further acquisitions as industry insiders estimate that around 80% of Australia’s 6000 childcare centres are independently owned.
However, investors should keep an eye on whether G8 is able to maintain its sterling track record when it comes to buying centres as competition is heating up. Newly listed Affinity Education, which debuted in December last year, is looking to employ the same strategy.
What’s more, there are reports that Stirling Early Education is aiming for a $200 million initial public offer in the coming months. Cherry picking the best independent centres is bound to get more challenging.
Meanwhile, Greencross has reaffirmed its 2013-14 pro-forma net profit of $21.5 million as it delivered a 28% increase in half year net profit of $4.4 million on the back of a 24% uplift in sales to $63.5 million.
The much bigger second-half number is due to the merger with pet supply retailer Mammoth, which recorded a 47% increase in net profit to $5.1 million for the six months to end December.
The news will also likely prompt analysts to upgrade their forecast for the group as consensus estimates is tipping an adjusted net profit of $15.8 million.
However, it will be a mistake for investors to assume smooth sailing ahead even as management is guiding for double-digit earnings growth in 2014-15 as bedding down any large merger is challenging.
G8 and Greencross are part of the Uncapped 100.