EVO - Evolve Education

[winner69]

Hope you have these as well noodles:


Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals – May 14, 2001 by James English


Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance – October 29, 2007 by James Montier

[winner69]

and this is a must

Predictably Irrational: The Hidden Forces That Shape Our Decisions Paperback – April 27, 2010 by Dan Ariely

Good to have a skim through when you do something really stupid and wonder why .... confirms you are normal after all

[Xirr]

EVO - another stock that meets my wouldnt touch with a barge pole test.

#1 risk - Assets - childcare - the value is 'generally' in the location. What, you mean you let them float the company without the underlying property assets? When the lease is up, the owner can in theory tell them to GTFO, rebadge as Poplolly Childcare and reap the benefits. Or just put up rents to eye-watering levels. Quite staggering the market is assuming this will NEVER happen.

Government subsidy - if you dont see the risk in income relying on 60%+ of government money, while at the same time declaring fabulous profits, you are pretty blinkered.

Yep there is home childcare packaged in there as well, but the big sell is the educare centres.

For the reasons above, I see Evolve as one of the riskiest stocks on the NZX, but not being priced that way.

[noodles]

EVO - another stock that meets my wouldnt touch with a barge pole test.

#1 risk - Assets - childcare - the value is 'generally' in the location. What, you mean you let them float the company without the underlying property assets? When the lease is up, the owner can in theory tell them to GTFO, rebadge as Poplolly Childcare and reap the benefits. Or just put up rents to eye-watering levels. Quite staggering the market is assuming this will NEVER happen.

Government subsidy - if you dont see the risk in income relying on 60%+ of government money, while at the same time declaring fabulous profits, you are pretty blinkered.

Yep there is home childcare packaged in there as well, but the big sell is the educare centres.

For the reasons above, I see Evolve as one of the riskiest stocks on the NZX, but not being priced that way.

From the Investment statement
"Evolve Education’s leases vary, but the term of the majority ofleases will be for approximately 15 years or more"
That is longer than DCF calculations! So I don't see this as a risk.

Fair call on the government subsidy. However, we should expect EVO to be one of the lowest cost operators in the industry due to their economies of scale. If government decide to cut subsidies, we might see a lot of other child care businesses close. It is also worth noting that the last budget actually increased child care funding

[Xirr]

From the Investment statement
"Evolve Education’s leases vary, but the term of the majority ofleases will be for approximately 15 years or more"
That is longer than DCF calculations! So I don't see this as a risk.

Fair call on the government subsidy. However, we should expect EVO to be one of the lowest cost operators in the industry due to their economies of scale. If government decide to cut subsidies, we might see a lot of other child care businesses close. It is also worth noting that the last budget actually increased child care funding

Fair cop - I didnt realise the lease terms were that long - have they provided an average lease term across the portfolio?

But - the discounted terminal value after 15 years is around 40% of the sum of discounted terminal value and discounted interim stream of cash flows - so it isn't immaterial.***

I presume any new assets they buy will not be subject to such long lease terms?

Still a risk for mine.

*** depends on the assumptions you use of course, I'm assuming 2.5% growth and an 8.5% discount rate.

[noodles]

Fair cop - I didnt realise the lease terms were that long - have they provided an average lease term across the portfolio?

But - the discounted terminal value after 15 years is around 40% of the sum of discounted terminal value and discounted interim stream of cash flows - so it isn't immaterial.***

I presume any new assets they buy will not be subject to such long lease terms?

Still a risk for mine.

*** depends on the assumptions you use of course, I'm assuming 2.5% growth and an 8.5% discount rate.

I don't have any more info on leases.

In any case, I don't think they will lose their lease. I do not believe the leaser will be nearly as profitable as EVO as they won't have the back office and flexible staff arrangements that come with EVO.

[Beagle]

Anecdotal feedback - I had an interesting discussion with my sister-in-law over coffee yesterday. She works at what was previously an upmarket day care centre in one of Auckland more affluent suburbs which was taken over by Evolve some months back.
I asked her how's things at work and got the following.
Bloody awful.!!...said with a highly discontented frowning look. I took the bait..as you do and asked why ?
Her - The whole atmosphere of the place has changed. We're not allowed to even heat the place properly, (this piqued my interest as I'm aware that according to the world health organisation the minimum temperature for a healthy workplace is 16 degrees Celsius).
Me - What do you mean don't they have a heat pump or two ?
Her - No they have a single electric heater and we're not allowed to run it much.
Me - What has been a typical temperature during the last week inside the centre ?
Her - 11 degrees and if we complain we run a real risk of being fired like my friend was last week. She went on - The kids used to get fresh fruit and decent lunches, now they get cheap rice crackers, (for those that don't know these are the $1 packs of cheap biscuits) and for lunch its mainly pasta and rice.
Me - Because that's the cheapest food they can provide right ?
Her- You got it.
She continued - I wouldn't dare ask for new teacher aids, equipment or toys for the kids...the word has come down, we keep costs to the absolute minimum.
Me - How are parents reacting to this ?
Her - We've had quite a number of parents pull their kids out of the centre in the last few weeks. She continued - I'm really not happy and to make matters worse we don't have quite the ideal number of qualified v unqualified care givers...really they have one too many qualified caregivers for the ideal ratio and I think they're trying to get rid of me and hire an unqualified replacement because its cheaper.
Me - They want to run the leanest legally allowable qualified v unqualified care-giver ratio for the number of kids at the centre to keep costs to the lowest level don't they ?
Her - How did you guess ?
Me - What would happen if you reported the unhealthy environment, (meaning lack of heating), to the authorities ?
Her - I'd be certain to lose my job and get a bad reference so would probably be unable to find another one.
Me - Do the other staff feel the same way ?
Her - Yep.

We then went on and discussed my brothers problems at his workplace....I felt bloody happy to be self employed at the end of that discussion.

Undernourished, cold, discontented kids...is this the future of early childcare in N.Z ?

Me ol mate Norah Barlow...you can really trust her to direct this company in a manner that's in the best interests of our young kids right ??????

Do you really want to invest in a company knowing they're not committed to the very best standards for early childhood education and welfare and that its only for profit. Profit comes before kids welfare...something makes me really uneasy about that.

[couta1]

Hey Roger I think Norah will do an excellent job of teaching kids good eating habits and the consequences of unhealthy choices aye

[Snapper]

Anecdotal feedback - I had an interesting discussion with my sister-in-law over coffee yesterday. She works at what was previously an upmarket day care centre in one of Auckland more affluent suburbs which was taken over by Evolve some months back.
I asked her how's things at work and got the following.
Bloody awful.!!...said with a highly discontented frowning look. I took the bait..as you do and asked why ?
Her - The whole atmosphere of the place has changed. We're not allowed to even heat the place properly, (this piqued my interest as I'm aware that according to the world health organisation the minimum temperature for a healthy workplace is 16 degrees Celsius).
Me - What do you mean don't they have a heat pump or two ?
Her - No they have a single electric heater and we're not allowed to run it much.
Me - What has been a typical temperature during the last week inside the centre ?
Her - 11 degrees and if we complain we run a real risk of being fired like my friend was last week. She went on - The kids used to get fresh fruit and decent lunches, now they get cheap rice crackers, (for those that don't know these are the $1 packs of cheap biscuits) and for lunch its mainly pasta and rice.
Me - Because that's the cheapest food they can provide right ?
Her- You got it.
She continued - I wouldn't dare ask for new teacher aids, equipment or toys for the kids...the word has come down, we keep costs to the absolute minimum.
Me - How are parents reacting to this ?
Her - We've had quite a number of parents pull their kids out of the centre in the last few weeks. She continued - I'm really not happy and to make matters worse we don't have quite the ideal number of qualified v unqualified care givers...really they have one too many qualified caregivers for the ideal ratio and I think they're trying to get rid of me and hire an unqualified replacement because its cheaper.
Me - They want to run the leanest legally allowable qualified v unqualified care-giver ratio for the number of kids at the centre to keep costs to the lowest level don't they ?
Her - How did you guess ?
Me - What would happen if you reported the unhealthy environment, (meaning lack of heating), to the authorities ?
Her - I'd be certain to lose my job and get a bad reference so would probably be unable to find another one.
Me - Do the other staff feel the same way ?
Her - Yep.

We then went on and discussed my brothers problems at his workplace....I felt bloody happy to be self employed at the end of that discussion.

Undernourished, cold, discontented kids...is this the future of early childcare in N.Z ?

Me ol mate Norah Barlow...you can really trust her to direct this company in a manner that's in the best interests of our young kids right ??????

Do you really want to invest in a company knowing they're not committed to the very best standards for early childhood education and welfare and that its only for profit. Profit comes before kids welfare...something makes me really uneasy about that.

Hi Roger, very interesting discussion you had. I have had quite a bit to do with childcare centres and find most childcare centre owners very smart, good people. Invariably they have one thing in common, a passion for providing quality childcare. How you translate that to a corporate ownership is beyond me. The corporate operators all look at childcare with sharemarket eyes - they buy at PEs of 4-5 thinking that it is very cheap but not realising how quickly a centre can go from being very profitable to losing money. Most parents can smell a disinterested or stingy owner a mile off.

Re government funding, the government have got good research showing the low term benefits of good quality childcare. Obviously the return gets lower where the kids have a good home environment; at the moment basic funding for children is the same in Remuera as it is in Kawerau which you wouldn't think is sustainable long-term. What is happening now is that the basic funding is staying pretty static while equity funding (which targets low socio-economic, isolation, special needs) is increasing. Funnily enough, I don't see any Evolve centres in Kawerau.

Participation rates are very high now and if you look at long-term population projections of 0-4 year olds then the only major driver of increased demand is going to be increasing attendance hours. For some reason, people have this idea that ECE centres are a license to print money; I would say that a number I dealt with last year were breaking even on an EBIT basis and some were losing money. With a lot more popping up in the main centres there is huge pressure on occupancy - those that had waiting lists a couple of years ago might have vacancies now.

Home-based is where Evolve may shine but that is a relatively small part of their business. If your friend's experience is indicative of the rest of Evolve's centres then parents will desert in droves as there is plenty of choice these days.

[Beagle]

Good post Snapper. I agree with what you've said. For my money and more importantly for the best care for my grandchildren on the face of it a nice caring couple are best placed to lead a team that provides the best possible environment for an early childcare centre. They live and work in the community and build respect and in so doing build profitability.
Corporatizing based on lowest possible input costs appears at least on the face of it to be counter intuitive in terms of maximising profitability given that as you quite rightly point out, there's lots of choice and people generally want the very best for their kids. I was shocked at the temperature issue, cheap and nasty food didn't shock as much.

In my opinion short term measures (like reducing electricity and food costs and lowering qualified staff ratio's and teacher aids to the bare legal minimum), to boost profitability will backfire on this company in the medium to long term as most parents have a finely tuned radar system when it comes to their kids satisfaction and wellbeing.