Thursday, September 28th, 2017
ASX code: TNK
Share price: $1.84
Industry: Early childcare
Forecast FY2018 Distribution: 12 cps, fully franked
Roll-up stocks are a mixed bag, particularly so within the early childcare sector still haunted by the failure of industry behemoth ABC Learning in 2010. Recently, providers such as G8 Education (ASX:GEM) have led a recovery, helping restore credibility to the listed model as it profitably expanded from 46 centres when it listed to 502 today.
However, because most returns come via multiple arbitrage – buying private operators on low multiples and incorporating them into a listed structure trading publicly at much higher multiples – early shareholders tend to benefit the most. This gives reason to consider Think Childcare (ASX:TNK), an early-stage Victoria-focused operator. With 3 per cent market share in Victoria, TNK is well placed to participate in the consolidation of the still highly fragmented industry.
Since listing in late 2014 TNK has grown its network of owned centres from 30 to 38, and in conjunction with ‘incubator’ partners, it has a pipeline of 62 centres. This facilitates a relatively low-risk acquisition strategy.
Essentially the incubator program allows TNK to select and manage sites to satisfactory utilisation and operating performance prior to acquiring at value-accretive purchase prices, generally 4 times EBITDA. TNK trades at around 9 times on the ASX. This suggests TNK acquiring the incubator pipeline in its entirety could add up to $150 million of market value (assuming an average exit EBITDA of $0.5 million for each centre). This compares well to TNK’s current enterprise value of $89 million.
TNK’s strategy is appealing, as aggressive acquisitive growth (buying lower quality businesses for too much) was what brought ABC Learning undone.
Although TNK has performed reasonably well in its short listed history, the first half of fiscal 2017 was challenging due to a combination of industry overcapacity and a stagnant childcare funding environment offsetting rising fee pressure in recent years.
TNK management expect the storm to abate in 2018 with utilisation set to improve on the back of a pull-back in new centre openings combined with the Australian Government’s Jobs for Families Childcare package to be launched on 1 July 2018, which will invest $37 billion in childcare over the next four years.
In the near term TNK will continue focusing on the Victorian market, which accounts for about 23 percent of total childcare usage in Australia.
Management are well aligned to shareholders with CEO Matthew Edwards and Chairman Mark Kerr collectively maintaining a 21 per cent stake in the business. TNK currently trades on a 6.5 percent 2018 yield (9.2 percent including franking credits) so the stock looks particularly interesting for the income oriented investor.
By Jonathan Wilson, Analyst at Clime Smaller Companies Fund www.clime.com.au/cscf