Think Childcare: Turning child’s play into earnings
◦Jonathan Wilson
◦The Australian
◦12:00AM September 26, 2017
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Think Childcare
ASX code: TNK
Share price: $1.84
Industry: Early childcare
Forecast Distribution: 12c per share, fully franked
Industry “roll-up” stocks, where a company aims to lead a sector by constantly building or acquiring operations, are a mixed bag. Investors still recall the failure of industry behemoth ABC Learning in 2010. Recently, providers such as G8 Education (GEM) have led a recovery, helping restore credibility to the listed model as it profitably expanded from 46 centres to 502 today.
However, because most returns come via multiple arbitrage — buying private operators on low multiples and incorporating them into a listed structure trading publicly at much higher multiples — early shareholders tend to benefit the most. This gives reason to consider Think Childcare (TNK), an early-stage Victoria-focused operator.
With 3 per cent market share in Victoria, TNK is well placed to join in the consolidation of the still highly fragmented industry. Since listing in late 2014, it has grown its network of owned centres from 30 to 38, and in conjunction with “incubator” partners, it has a pipeline of 62 centres. This creates a relatively low-risk acquisition strategy.
Essentially, the incubator program allows TNK to select and manage sites to satisfactory utilisation and operating performance before acquiring at value-accretive prices, generally set at four times EBITDA. TNK trades about nine times on the ASX. This suggests TNK acquiring the incubator pipeline could add up to $150 million of market value (assuming an EBITDA of $0.5m for each centre). This compares well to TNK’s enterprise value of $89m.
Although TNK has performed reasonably well, the first half of fiscal 2017 was challenging due to a combination of industry overcapacity and a stagnant childcare funding environment offsetting rising fee pressure.
Management expects the storm to abate in 2018 with utilisation set to improve on the back of a pullback in new centre openings and the government’s “Jobs for Families” package to be launched on July 1 next year, which will invest $37 billion in childcare over four years.
TNK trades on a 6.5 per cent 2018 yield (9.2 per cent including franking credits) so it looks particularly interesting for the income-oriented investor.
Jonathan Wilson is an analyst at Clime Smaller Companies Fund.
www.clime.com.au/cscf
http://www.theaustralian.com.au/bus...k=e58e735b87b774dbdabd86d90942bb01-1506538119