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Demand for childcare in Asia will only increase
After a long boom, things are starting to go sour for Australia.
Business investment plunged in the most recent quarter. This suggests that firms are worried that demand for their products and services is falling, so they’re cutting back.
Given the country’s dependence on the commodity boom, this is no surprise.
However, there’s one sector that looks recession-proof – childcare. Better yet, there are huge opportunities in this sector across the rest of Asia.
And one Australian company is well-placed to benefit…
Australia needs more babies
Like most developed countries, Australia is worried about its greying population. With people living longer, it faces having a shrinking number of workers funding an ever growing group of retirees.
One way to deal with this of course, is to cut back on state pensions and force people to work for longer. However, that’s not a popular solution with voters. So, for the past ten years the government has been trying to do two things.
Firstly, it’s trying to raise the birth rate – increasing the number of young people around to support the growing ranks of the elderly. Secondly, it is trying to increase the size of the overall tax base by encouraging more women to go out to work (what is known in the jargon as the ‘female participation rate’).
To boost birth rates, the government has been giving direct cash payments to parents (known as the ‘baby bonus’). And to help women back to work, nursery places are subsidised. Parents can claim back up to half of the money that they spend on private nurseries.
These policies have had some success. According to the Australian Bureau of Statistics, the percentage of women in work with children aged up to four grew from 46.5% to 54% from 1999 to 2011. Overall, nearly two-thirds (65.2%) of women work.
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Meanwhile, the birth rate has reached 1.9 children per woman, which is just below the ‘replacement level’ – the level at which births and deaths effectively balance out.
In turn, this has helped create a boom for childcare providers. And there are calls for the Australian government to do still more, from making childcare costs deductible against income tax, to raising the amount paid in child benefits. As a result, market researcher IBISWorld expects demand to keep growing by nearly 5% a year through 2016.
Even if the Australian economy takes a tumble – and we fully expect it to – this is a long-term trend. For one thing, if a downturn bites, one way for families to maintain or boost their incomes is for both parents to go out to work. For another, it’s not just about Australia. As economies throughout Asia become wealthier, the demand for childcare across the region can only increase.
Cashing in on childcare demand
One firm that looks well-placed to benefit is G8 Education (Germany: 3EAG). The company has 175 childcare centres, with capacity of nearly 14,000 places. Its sales have grown from just A$31m in 2008 to A$179m in 2012. That’s an annual growth rate of 55% a year.
And this isn’t just mindless growth at any cost. From losing money in both 2008 and 2009, G8 made A$5.6m in 2010, A$23m in 2011 and A$25m in 2012.
Companies in the sector, seduced by the prospects of rapid growth, have run into trouble in the past, burning shareholders in the process. At its peak five years ago, Australia’s ABC Learning provided 100,000 places – 20% of the total childcare market.
But it grew too far and too fast. Instead of reinvesting profits, it took on huge amounts of debt. It also made some ill-judged acquisitions, including chains in the US and UK. As a result, when the credit crunch hit and profits took a sudden downswing, it was over-extended and unable to refinance its debt.
G8, however, has been run in a much more sober manner. While it has taken over some small regional providers, it has funded this via profits and issuing shares, not debt. Overall, its financials are solid, with debt accounting for only a fifth of total capital.
Another attraction is that G8 is not just expanding in Australia. It is also entering the Singaporean market. Like Australia, Singapore is trying to boost its birth rate, and needs more childcare facilities, which should provide plenty of opportunity for G8.
G8’s share price has doubled in the past year. However, it still trades at only 13.6 times forward earnings, which when you take into account its rapid growth – and the solid prospects for the sector - looks good value. It even offers a decent dividend yield of 3.7%.
For more ways to profit from Asia’s ongoing economic development, you should sign up for our free weekly email, The New World.
• This article is taken from the free investment email Money Morning.
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