If Labor makes good on former promises, the Albanese-government’s first budget, due out tomorrow night, should benefit smallcap Mayfield (ASX: MFD) and its midcap counterpart G8 Education (ASX: GEM); two key players within the listed childcare sector.

Back in March, Labor leader Anthony Albanese, updated the country on the party’s long-standing commitment to making childcare more affordable.

In 2020 Labor vowed to increase the maximum subsidy rate to 90% for families up to $80,000, removing the annual subsidy cap, and smoothing the taper rate down more gradually from the new 90% rate.

In response to electorate pressure, the Morrison-government government subsequently matched this by removing the subsidy cap and introducing a higher subsidy for families with more than one child under six.

1.26m families would be better off

At the time, Labor claimed that by locking this higher rate in, 1.26m families would be better off, five times more than under the Morrison government.

Within previously disclosed policy, Labor also committed to:

• Lift the maximum childcare subsidy for one childcare

• Increase CCS rates for every family with one child in care earning less than $530,000 in household income

• Lift CCS rates for the second and more children in care

With childcare costs having increased by 6%-plus in the previous 12 months – almost double the rate of inflation - it’s understood the average family is now paying almost $5,000 more in fees.

As a result, back in June early childhood education minister Anne Aly noted that the government was considering fast-tracking the policy to help families struggling with the rising cost of living. 

Participation & occupancy rates

Based on Labor's estimates, 96% of families stood to benefit under the new government’s policy.

Canaccord Genuity expected greater participation and occupancy rates to benefit both Mayfield Childcare and G8 Education.

While the childcare sector is facing widespread staff shortages, with job vacancies expected to surge to 39,000 in the next 12 months, the broker expected demand, which is outstripping growth in supply, to continue to drive occupancy in the sector.

G8 Education

G8’s share price is down around -14% in the last 12 months but has risen from $0.91 to $0.96 since last Wednesday.

Consensus on the stock is Moderate Buy.

Based on Morningstar’s fair value of $1.27 the stock appears to be undervalued.

Significantly impacted in the first quarter by covid and floods, G8 reported operating earnings (EBIT) $21m (after lease expenses) for the first of 2022, 85% lower than the previous period.

Management noted that the company was on track to deliver a targeted $13m-$15m cost reduction to streamline the business and mitigate inflationary impacts by the end of the second half 2022.

The company also noted that its balance sheet “remains strong” with net debt at $86.3m as of 30 June.

What brokers think

Based on the two brokers that cover G8 (as reported on by FN Arena) the stock is currently trading with 23.7% upside to the target price of $1.175.

After reporting a -10% miss on first half FY22 results, against Macquarie’s expectations, the broker has adjusted earnings forecasts for lower occupancy, and higher operating expenses from inflationary pressures by -3% and -4% for FY22 and FY23.

The broker retains a Neutral rating and $1.00 target price.

With revenue and earnings beating UBS’s estimates by 5% and 6% respectively, the broker notes occupancy recovery is progressing well, and suspects G8 could get back to pre-covid levels by December - which could add $3m upside to earnings forecasts.

The broker’s Buy rating and target price of $1.35 are retained.

G8 Education share price over 12 months.

Mayfield Childcare

Mayfield’s share price is down around -18% in the last 12 months and has been on a downward trajectory since mid-August.

Consensus on Mayfield is Hold.

Based on Morningstar’s fair value of $1.88 the stock appears to be undervalued.

At the half year to 30 June, the company reported total revenue of $32.4m, up 85%, while bottom line net profit (NPAT) was $3.5m, up 122% on the previous period.

The company declared an interim dividend for the half year ended 30 June 2022 of 2.76 cents per ordinary share, fully franked.

While occupancy across the group continue to strengthen, Mayfield flagged increased labour costs due to educator shortages, but noted it had passed on some price increases to customers.

However, with the ongoing high costs associated with labour shortages and the need for agency staff, the flow through of both a higher than anticipated mid-year wage increase of 4.6%, and the inflationary environment, management notes the CY22 forecast earnings (EBITDA) target of $8.0m will not be met.

Mayfield Childcare share price over 12 months.