Tim Boreham: There are no jokes in childcare

Long coveted for their government-aided income and backed by favorable demographics, the listed nurseries are being chosen through takeovers, one by one.

Earlier this month, the one in Melbourne Mayfield Child Care (ASX: MFD) disclosed an indicative cash offer for private education Genius, at $1.28 per share (a premium of about 30 percent).

With Mayfield acquiring 14 Genius Learning Centers in 2021, it’s a bit of a story.

It’s not yet pick-up time for the acquirer, either: Busy Bees Early Learning, also privately held, has entered the fray with a tentative offer of $1.35 per share.

The busy bees have been, well, busy bees, as they scooped the Think Education list last year at a generous 170% premium.

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Melbourne operator of 21 centers Mayfield is busy chatting to both sides, and anyone else hiding behind the finger-painted easels.

Over the past decade, childcare centers have been a popular investment for small operators and even better for corporate players who have led consolidation in a still fragmented sector.

Profitability has not been constrained by the dominance of not-for-profit operators, notably Goodstart (which acquired the centers from Eddy Groves’ collapsed ABC Learning).

In November, federal parliament approved Labor’s promised measure to extend the childcare allowance to more families – 1.2 million of them – with struggling incomes of up to $530,000 a year.

Assuming Mayfield is eliminated, bigger G8 Education (ASX: GEM) and Kiwi-based, double-listed Embark Education (ASX: EVO) they will be the only ASX copies.

This month’s G8 trade update pointed to a 5% drop in year-to-date net operating profit ($41m at the end of November) and flat employment.

The company has been able to absorb an 8% increase in wages, half through actual wage increases and half through increased use of agency staff.

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Headed by former G8 boss Chris Scott and formerly known as Evolve Education, Embark is set to sell its roughly 100 childcare centers in New Zealand to private equity for about $43 million. The company believes there are better prospects in Australia and plans to strengthen its current complement of 24 local centres.

An alternative option is to invest in childcare landlords, who benefit from consistent rental income and long lease terms without the hassle of cleaning up Lego and vomit. Take the listed real estate investment trust Arena REIT (ASX: ARF)which houses 263 “social infrastructure” properties, 252 of them nurseries.

Arena doesn’t seem to be suffering too much from the Reserve Bank’s stiff medicine, at least so far.

In the year to June 2022, Arena increased net operating profit by 8 percent to $56 million, and the value of its childcare portfolio increased by 24 percent to $1.28 billion dollars

Management marks a current-year distribution of 16.8c per security, up 5%, and whistles: “Operator employment remains robust and higher than any previous corresponding period over the last six years.”

Having acquired the Folkestone Education Trust in 2018, Charter Hall Social Infrastructure REIT (ASX: CQE) owns 364 childcare centers valued at $1.64 billion.

Around 85 per cent of its rental income comes from early learning centres, mainly from tenants Goodstart and G8 Education.

The fund last year increased operating earnings by 8 percent (to $62.9 million) and also increased the value of its portfolio by 19 percent, or $269 million.

Despite their apparently robust earnings outlook, Arena and Charter Hall have lost 15 percent and nine percent of their value this year, respectively.

The selling reflects the rising cost of funding risks, but if things get tough, more bargain assets will be available to buy.

This story does not constitute advice on financial products. You should consider getting independent advice before making any financial decisions.

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