GEM - G8 Education

[ROE]

Its an example of why I am a fundamental investor, and why I dont hold GEM!

Sometimes different forms of analysis lead to the same conclusion.

Don't go there else it will turn into another TA vs FA thread ..The eternal war...
Whatever make people money is best course of action

 

[pavilion103]

Not intending to start an argument.
I just like it simple. I would suck with fundamentals. Others in here are probably great.

 

[galumay]

Not intending to start an argument.

Nor I, Pav. I was genuinly noting that very different approaches sometimes come to the same conclusions.

The subtext I guess is, be very careful if 2 entirely different approaches come to the same conclusion about a potential negative impact on share price!

 

[pavilion103]

Trading halt.

Maybe got out of this one too soon.

I sold out of fear.

 

[Porper]

Trading halt.

Maybe got out of this one too soon.

I sold out of fear.

Maybe not as well Pav. Even if it's good news it could head lower. There must be a lot of good news built in. Either way my target hit so am out and happy to be.

 

[VSntchr]

Traditionally they have bought centres at 4xEBIT. Now this acquisition is 5.7xEBIT...

I hope the perhaps irrational pricing of their stock by the market is not beginning to influence the price they pay for centres to ensure that the rapid growth and SP appreciation, that the market now expects, continues.



ABC learning's downfall was paying too much for centres and using too much debt.
I could be wrong but this acquisition could be the start of the former occuring for GEM.

 

[skc]

Traditionally they have bought centres at 4xEBIT. Now this acquisition is 5.7xEBIT...

I hope the perhaps irrational pricing of their stock by the market is not beginning to influence the price they pay for centres to ensure that the rapid growth and SP appreciation, that the market now expects, continues.

ABC learning's downfall was paying too much for centres and using too much debt.
I could be wrong but this acquisition could be the start of the former occuring for GEM.

Interesting The GEM announcement is that they are paying $228m on EBIT $39.4m for 91 premium centres (whatever premium means...). While the Sterling IPO was pitched at a market cap of ~$237 to $260m for 77 centres.

So they managed to buy more than the IPO's offer at a lower price... It's a big slap in the face for Sterling's management/seller. Basically the market is saying "We won't buy you, but we are happy to buy into GEM's placement who buys you". So draw your own conclusion about the relative perception of GEM and Sterling's management.

You can argue that GEM paid more for Sterling than they have in the past, but this is a huge acquisition. All the information was out there in the public domain (due to the IPO) and it's a large number of centres. There's perhaps more economies of scale to be extracted and overheads to be removed. So I would say a higher price paid is not unjustified.

The market prices GEM's EBIT at ~28x. So the acquisition of ~$40m in EBIT can increase market cap by $800-1B . Takeout the effect of increased shares on issue from the placement ($100m @ $4.60 according to AFR), this share can trade well north of $5 if current pricing multiple prevails.

 

[ROE]

When it has the market cap north of 4bn and ASX CFDs let them in I will short it

 

[pavilion103]

I guess the good thing about an over inflated company is that prior to price collapsing, evidence of the collapse appears on the chart. It doesn't just halve in one day. So for those observing, signs will appear if this is the case with GEM.

 

[peaceofmind]

now paying 5.8x EBIT. starting to get desperate i feel.

currently in a bubble. no way is a pe of 20x justified for child care stock without any organic growth.

traditionally, a p/e of 10x was correct pre-GFC for a mid cap or small cap company without any organic growth(i.e. steady state)

What happened to the pre-GFC valuation measures? Too much liquidity, money printing and low interest rates have encouraged massive risk taking boosting the acceptable multiple over 100%. We now have a host of small and mid cap companies with p/es well above 20x, some even 30x like SEK, some don't even have a p/e like XRO $5bn mkt cap on sales of only $50-100m!

if rates go up next year high multiple stocks will go down.

also its got massive long term risks from government subsidy cuts.

 

[Huskar]

this acquisition could be the start of the former occuring for GEM.

When you see a bubble beginning to form, rush to it not away: reflexivity.

 

[Judd]

I don't hold but it is really, really nice of management to make a $100m placement in two lots to the sophisticated and institutional lot.

Any chance for the smaller fry or are they just to be diluted? :arsch:

 

[Judd]

.......Any chance for the smaller fry or are they just to be diluted? :arsch:

Oh great. A Share Purchase Plan. So the instos get as many as they applied for and the little fella is limited to 3,260 shares.

 

[VSntchr]

The market prices GEM's EBIT at ~28x. So the acquisition of ~$40m in EBIT can increase market cap by $800-1B . Takeout the effect of increased shares on issue from the placement ($100m @ $4.60 according to AFR), this share can trade well north of $5 if current pricing multiple prevails.

SKC, just wondering how you calculated the 28x multiple?

The additional centres are looking at contributing ~$35m (FY15 is expected to be $39m based on purchase price), which would put GEM EBIT on at least ~$120m for FY14.
Shares are trading at $4.95 and I am guestimating that there will be about another 35m shares on issue after this latest CR? Which would take the total to 335m shares on issue..providing a market cap of $1658m.

With these figures the forward estimate I calculated (I used forward as earnings seem pretty visible) is ~14x.

 

[skc]

SKC, just wondering how you calculated the 28x multiple?

The additional centres are looking at contributing ~$35m (FY15 is expected to be $39m based on purchase price), which would put GEM EBIT on at least ~$120m for FY14.
Shares are trading at $4.95 and I am guestimating that there will be about another 35m shares on issue after this latest CR? Which would take the total to 335m shares on issue..providing a market cap of $1658m.

With these figures the forward estimate I calculated (I used forward as earnings seem pretty visible) is ~14x.

I just took the last reported FY EBIT at $48.5m, and the market cap before the capital raising at ~$1.4B. With high growth expected in EBIT the use of historical and forward EBIT will make a huge difference. The forward EBIT before the latest deal was probably around $75-80m, so a multiple of 17.5x or there about.

 

[McLovin]

This is a little strange...

It can be revealed that Scott, who was appointed to his position in 2010, was once the owner and director of a private company, Geosine, according to documents lodged with the Australian Securities and Investments Commission. Geosine was under Scott’s control until January 2013, at which point the shares in the company were transferred to a woman called Kimberley Yin.

Less than two months later in March 2013, Geosine was announced as a new substantial holder in G8 with just over 20 million shares that gave it control of 7.4 per cent of the company.

Hutson confirmed to the AFR Weekend that Geosine still owns 20 million shares.

Yin lives at the same Gold Coast address as Scott. According to property records, Yin owns the $3 million Sanctuary Cove house, set on the waterfront in a gated community. The address matches that which Scott lists in ASIC documents as his residential address.

When asked about the nature of Yin and Scott’s relationship, Hutson said: “They know each other, I’m aware of that. I don’t know that it extends any further than that.”

Reading the entire article, it seems like these guys just try their hand at whatever.

http://www.afr.com/p/business/companies/chris_scott_and_his_secret_network_8GKvKCCsm58NyOMz6EuPLK

I don't trust any of these roll up business models. Although the growth is cheap, it's not organic, it's purchased and like everything else once the low hanging fruit is bought multiples paid will have to start rising. Then the fat lady will start wailing.

 

[pavilion103]

If I was still holding my $3.72 entry I'd contemplate pyramiding at $5.10.

 

[Lone Wolf]

If I was still holding my $3.72 entry I'd contemplate pyramiding at $5.10.

This is a common idea that I don’t really understand. Why are people happy to risk open profit but not realized profit?

If you were still in the trade you’d consider risking the open profit by pyramiding here. But since you’ve already closed the trade you no longer consider it worth the risk?

In my view the risk/reward and probability of the trade have nothing to do with what you’ve made previously. So why does it affect your decision about it being a decent setup? Shouldn’t each pyramid trade be able to stand alone as a setup worth taking?

Not having a go, your idea is shared by other successful traders. Just interested in your view.

To make this slightly on topic. GEM came up in my scans ages ago and I passed.

 

[pavilion103]

This is a common idea that I don’t really understand. Why are people happy to risk open profit but not realized profit? If you were still in the trade you’d consider risking the open profit by pyramiding here. But since you’ve already closed the trade you no longer consider it worth the risk? In my view the risk/reward and probability of the trade have nothing to do with what you’ve made previously. So why does it affect your decision about it being a decent setup? Shouldn’t each pyramid trade be able to stand alone as a setup worth taking? Not having a go, your idea is shared by other successful traders. Just interested in your view. To make this slightly on topic. GEM came up in my scans ages ago and I passed.

This is a very good post.
I don't disagree.

If I was going to add it would be a smaller position.

But why wouldn't I take the trade anyway with a smaller position? I don't know. Probably something for me to consider more deeply.

 

[pavilion103]

In fact I probably will give this a look at end of day.

On a separate note even if I like the setup the opportunity cost of capital will need consideration. I'd assume for this one I'd have a reasonably right stop which would require me to take a larger position than usual (fixed fractional).