Affinity Education AFJ

[mark100]

Affinity Education lists on Monday 9 Dec. I originally thought the stag on it could be 20% plus but given the market performance this week and the poor listing performance of PSZ and LHC I think the premium might be quite low which presents an opportunity in my view.

AFJ is no doubt opportunistic in that it is a newly formed roll-up of childcare centres. However the current market darling in this sector, GEM, started out the same and it's now rated on a PE of 30.

AFJ will list with 57 childcare centres purchased at an EBIT multiple of 4.1x. They are forecasting FY14 proforma NPAT of $8.3m and EPS of 9.3cps which puts it on a PE of 10.8x the listing price. They will be debt free on listing however they have a debt facility approved with CBA for $20m which will be used to acquire more centres.

If they use this $20m debt facility to buy more centres on an EBIT multiple of approx. 4.1x in theory they should be able to lift EPS to 12.1cps (30% accretion) before needing to raise new equity.

Basically I think its got the potential to be a $2 stock in the next 12 months. I also note the Boat Fund is listed in the Top 20. I hold and will buy more if the listing price is not too crazy

[mark100]

Do you know if GEM owns their centres or leases them? Affinity is the centre operator only as they have sold the centres to ARF. This may be a material difference between GEM and AFJ.

Gem also leases. Occupancy is the 2nd largest expense after labour for GEM. They also only have $1.5m of property on the balance sheet which would not buy you many buildings!

[born2invest]

Their prospectus sure paints a rosy picture of growth over the next few years.

Will be interesting to see how it pans out.

[Rodin]

Initiation of coverage by BBY today...

"We initiate coverage with a A$1.50/sh target price and a BUY recommendation. Our 12 month target price is equivalent to a FY14 PE of 15x and EV/EBIT multiple of 11.9x. This places AFJ at ~45% discount to GEM."

[mark100]

CBA (did the IPO) puts a $1.60 target on it

[Joshuatree]

Share raising @$1.12 ,3 for 4 to fund buy of 51 centres

[Entrep]

Share raising @$1.12 ,3 for 4 to fund buy of 51 centres ouch that's low!

[mark100]

ouch that's low!

It's a renounceable entitlement issue so it makes no difference to holders what the price is. 50c or $2 as long as you take up your rights or sell them. If they did a placement at $1.12 I would not be happy. The shares issued to one of the vendors were at $1.365

[mark100]

Both AFJ and GEM are now over paying for centres - are we heading for another ABC Learning-style bust where expansion is at the cost of shareholder returns?
http://www.theage.com.au/business/affinity-education-latest-childcare-operator-to-join-buying-spree-20140408-36b5o.html

Yes they are paying more and the current multiple is about as high as I will tolerate. As for ABC comparisons, AFJ is funding this deal with 90% equity so hardly a company busting deal. ABC was also paying closer to 10x EBIT in USA deals leading up to 2007 and developing greenfield sites. On a 100% equity basis, the 5.3x EBIT works out as a PE of 7.43x. But newspapers have to write something...

[mark100]

How does it impact overall EPS for FY15 after accounting for the cap raise? That's what I meant by an ABC Learning bust - the EPS and ROE broke down long before the company got into trouble. Fortunately for me, I got out in time by looking at the bottom line numbers not the headlines. I have a couple of other shares in the same basket - growth in NPAT is not translating to EPS growth due to all the extra equity issued. Its reminiscent also of the debt collectors race to the bottom in their efforts to acquire debt ledgers at any cost, just so the competition didnt get it. I don't own any of the childcare operators, but do own all the REITs that own the centres - so the health of the operators is a concern.

On my numbers it's 20% EPS accretive (excl one-off costs) which is ok but not as high might have been expected given the deal size. While the purchase price is $80m they are raising $98m, with $7m being allocated for 'general corporate purposes' (I assume working capital), $4m for stamp duty and $7m for offer costs. The AFR mentioned the offer costs seemed high and AFJ appeared to be paying some fees etc that are often paid by the vendors, not the buyer. Not sure what to think about that one...

So my 'proforma' CY15 EPS estimate is around 11.2cps and a ROE of 13%. At the TERP of $1.25, that's an undemanding PE of 11x. Of course that estimate will probably never come to pass because more deals will be done.

The ROE appears a bit on the low side but that's with a D/E ratio of just 6%. With the increased balance sheet following this deal I expect the next lot of acquisitions could be debt funded up to maybe $35m - $40m which will increase the ROE somewhat.

Speaking of debt collectors I think CCP offers great value at the moment, chart not so good though. Watching closely

[DarkHorse]

Hi Mark,
just been having a little first up look at AFJ. They certainly look tempting considering estimated 2015 PE and growth potential. Would be very interested to hear your current thoughts.

[Joshuatree]

That would hurt! The DMA worked for you again KW?. Maybe Gem has already done most of its bloodletting.

[Joshuatree]

38 million @ 70c each

www.afr.com/street-talk/g8-education-takes-16pc-stake-in-affinity-education-group-20150702-gi3s8p (http://www.afr.com/street-talk/g8-education-takes-16pc-stake-in-affinity-education-group-20150702-gi3s8p)

and
http://www.fool.com.au/2015/07/02/is-affinity-education-group-ltds-earnings-update-a-warning-shot/

[babymonster]

Gem might takeover afj

[Joshuatree]

Yep ;takeover offer at a 29.6% premium. ;One GEM for 4.61 AFJ valuing AFJ at $162 million (70c share).

[mark100]

A merger might be of benefit for GEM as it will take out an acquisition competitor. AFJ put out a prospectus saying they would acquire centres at 4x EBIT, their first big transaction exceeded that, which I was prepared to overlook, but subsequent acquisitions they didn't disclose the multiple. Hence I sold. AFJ's presence has also caused GEM to start paying more for acquisitions. Getting rid of AFJ might get the multiple back to 4x EBIT

[mark100]

Yeah I wouldn't touch AFJ/GEM at the moment. I'd call GEM a mature roll-up, similar to SGH. The bets get bigger while the shareholder returns get smaller. Roll-ups are only fun in their early stages but AFJ couldn't even get that bit right, maybe because the sector was already mature