G8 Education has announced the early redemption of its $70 million 7.65% corporate notes, a decision Ord Minnett views as both financially astute and a sign of management’s confidence in G8 Education’s earnings and cash flow outlook.
Our FY17 net interest forecast of $20 million had already assumed this early repayment would occur, but we expect other analysts will have to reduce net interest expense in their forecasts (the consensus average net interest is about $23 million).
We continue to see a number of positive catalysts for G8 Education, including a potential club bank facility; improving confidence in occupancy; a rerating of operational improvement success, based on return on invested capital (ROIC); value accretion from the development book; and the new child-care funding package coming into effect. We believe the risk-reward profile remains highly favourable with the stock trading on attractive multiples.
G8 Education noted it retains access to a $50 million revolving bank facility. We view the early repayment as a sign of management’s confidence in the earnings and cash flow outlook and, by default, occupancy trends. This supports our thesis that the industry is experiencing the effects of a supply peak and that we should see an incremental improvement, particularly through CY18 as the new funding regime comes into play.