Two childcare stocks to benefit from an in-bound Labor government

Canaccord Genuity believes the incoming Labor government’s plan to make childcare more affordable, by raising the percentage of fees covered by government, will benefit certain players in the listed childcare sector.

As result, the broker has Buy ratings on largecap ($1bn) G8 Education (ASX: GEM), and its smallcap counterpart ($91m) Mayfield Childcare (ASX: MFD).

Given that neither G8 Education, nor Mayfield had announcements today, much of share price gains at the close can be attributed to Canaccord’s outlook on the two stocks.

Participation & occupancy rates

Based on Labor's estimates, 96% of families will benefit under the new government’s policy, and this is expected to have a net effect on participation and occupancy rates for some key providers.

“We continue to believe that demand growth is outstripping growth in supply, which should continue to drive occupancy in the sector,” the broker noted.

The broker cites the recent acquisition of Australian early childcare giant Only About Children (OAC) to US operator Bright Horizons for $450m as a clear signal the sector remains undervalued.

Early May, Bright Horizons CEO Stephen Kramer told the market that the OAC acquisition marked a "great starting point" for the group’s expansion plan in the Australian market, especially in light of the Federal Government's programs to help "defray the costs of childcare".

G8 Education

Despite an uninspiring first quarter trading update early April, with occupancy falling to 2.1% behind 2021 levels in early March, the market seems to have taken some comfort from suggestions that the worst of the covid and flood impact are now behind the group.

Since then the share price has rallied 6%, and is up 22.68% for the year.

G8 Education share price over three months.

While the financial performance of the group in 2021 was significantly impacted by covid, management advised that cash flow generation continued to be strong at $84.3m.

The group also maintained a strong balance sheet, with net debt of $25.9m at the end of 2021 and access to $300m of committed bank debt facilities.

Given the group’s sound capital position, management recently announced an on-market share buyback which commenced late April.

“The measures we are implementing are prudent and will deliver short and long-term benefits to the company,” noted G8 CEO Gary Carroll.

“These actions are appropriate in the current environment and at this stage of our transformation program, enabling us to continue delivering the best quality outcomes for families with a more sustainable cost base.”

To respond to the challenging environment, the group’s total cost reductions are targeted at $13m - $15m for the remainder of 2022, predominantly realised in second half.

Consensus on G8 Education is Moderate Buy.

Based on Morningstar’s fair value of $1.60, the stock appears to be undervalued.

Based on the two brokers that cover G8 Education (as reported on by FN Arena) the stock is trading with 6.7% upside to the target price of $1.27.

Mayfield Childcare

Mayfield’s share price surged by as much as 9.6% to a high of $1.49 before retreating back to $1.42, and over the last 12 months the stock is up 31.48%.

Despite covid disruptions, the early childhood education and care provider delivered a solid operational and financial performance for FY21.

Dean Clarke CEO also noted that the acquisitions secured in 2021, including the Genius Childcare acquisition helped to substantially change the economics and financial standing of the business.

“Future acquisition opportunities associated with the incubator arrangements between Mayfield and Genius are under assessment, with new additions to the portfolio expected early in the second half of 2022,” said Clarke.

Centre based revenues were $38.6m in 2021, up from $24.7m in 2020 and around 7% higher than revenues recorded in 2019.

Based on Morningstar’s fair value of $1.98, the stock appears to be undervalued.

Mayfield Childcare: A three month share price snapshot.