About time something positive being said about GEM: GEM:ASX : G8 EDUCATION LIMITED is being supported by Bank of America Merrill Lynch analysts who have come out in support for G8 Education, saying an underwritten dividend reinvestment plan and strong free cash flow would be enough to see off fears about an equity raising.
G8 shares have been heavily sold over the past six weeks on fears about the roll-up's balance sheet and its ability to fund future acquisitions.
"However after recent discussions with management, we do not believe an equity raising is imminent," BAML analysts told clients this morning.
"GEM's acquisition pipeline is for a lesser 80-100 centres pa (vs more than 200 last year), which allows for a large part of the company's acquisition growth to be internally funded."
BAML said internal funding sources included the $50 million to $60 million fully underwritten DRP, which could fund the acquisition of about 50 centres, $120 million forecast free cash flow and expected $150 million cash balance come the end of 2015.
The analysts also backed G8 to continue its strong growth and double its market share over the next three to five years.
"Despite GEM still being a 'roll up' play, it is no longer being priced that way having de-rated to 12.9x FY15e earnings (a 20% discount to market)," the analysts said.
"In our view, the market is effectively ignoring the consolidation opportunities in the sector and/or discounting management's ability to make successful acquisitions and earn a return above its cost of capital (despite its track record). Either way, we believe such a view to be unjustified and overly bearish."