****Trading Idea: BUY G8 Education (ASX: GEM)****
G8 Education provided a trading update to the market earlier this week, which saw their shares have a significant fall in share price, falling as much as 23% on Monday. With the shares now trading around $3.46, we feel the shares are undervalued at this level, and are happy to buy G8 Education at this level.
We have maintained our $4.00 fair value estimate on the stock and don’t believe G8’s model is broken. Most of the downgrade was attributed to weaker than expected childcare centre occupancy which isn’t surprising considering the industry has been highlighting an oversupply of new childcare centres for the past year. G8 managed this issue well in the first half, but competitive pressures resulted in a weaker second half. In addition the company didn’t anticipate legislative changes to employee rules which resulted in higher employee costs, which are anticipated to fall as permanent employees replace temporary employees.
We anticipate the childcare industry to continue to benefit from long-term supportive tailwinds, such as population growth and increasing female workforce participation. In addition, the Federal Government remains supportive of the industry and government funding will increase for many families in mid-2018 which should boost demand for childcare services to offset the oversupply.
I have also attached a piece from our research team on the company for you to have a look at
If you would like to discuss purchasing shares in G8 Education, please contact your adviser.G8 Education Research Note - BUY