At face value, Australia’s ASX-listed childcare sector has some enviable drivers that other sectors would dearly love, yet it remains relatively unloved by Australian investors.
The five listed stocks within the sector – seven if you include two REITs that collect rent from childcare operators – should benefit from favourable market dynamics, with around 300 new childcare centres required annually just to keep up with a massive rise in demand for their services.
Growth drivers
What’s driving that growth is the number of mothers entering the workforce with children in the 0-4 age group who need looking after daily.
To ensure the sector can meet that demand the Federal Government – which has lent its support to the sector through funding, subsidies and wage increases for childcare workers – accounts for over 70% of the industry’s revenue.
Given these favourable dynamics and growth drivers, the sector should attract investors looking for stocks with reliable underlying core income streams that also tend to be strong dividend payers.
But despite being a $20 billion market that hires over 200,000 people, the sector has been largely overlooked by investors with the sector down around 12% over the last 12 months.
Take out the two REITs that sit within the sector and the share price in the five pure-play childcare stocks is down on average around 20% over one year.
Scandal
While arguably more stable than some cyclical industries, the sector is not without its challenges, as the market was reminded of last month when a male childcare worker was charged with more than 70 offences in Victoria.
The sector’s single largest pure-play childcare provider, G8 Education (ASX: GEM) saw its share price fall 12% from $1.12 on 1 July to $0.948 today following revelations that the male in question had worked at the company’s Point Cook location - between 28 October 2021 and 2 February 2024 – where the atrocities are alleged to have occurred.
Given that this is now a legal matter, the company reassured the market that it remains committed to child safety and protection. However, the incident clearly has implications for a sector which predominantly hires women.
Fallout
It’s understood that male educators will no longer be involved in changing nappies or toileting duties at a string of Victorian childcare centres.
However, incidents of child abuse at childcare centres are far from new with politicians having vowed to introduce new laws to strengthen working with children checks that were recommended a decade ago during the 2015 Royal Commission into Institutionalised Responses to Child Sexual Abuse.
Meanwhile, recent events have not gone unnoticed in Canberra, with federal education Minister Jason Clare announcing plans to introduce legislation to allow fraud investigators to conduct random, unannounced visits to childcare centres without a warrant, and without the need to be accompanied by police.
While Clare also plans to introduce laws to allow the federal government - which currently provides $16 billion of annual funding to centres - to waive payments to operators failing to meet standards, there are no current timelines in place.
Overhang and other risks
Interestingly, two days after the Point Cook scandal, Macquarie downgraded G8 Education shares from outperform to neutral and cut its 12-month price target by 25% from $1.53 to $1.15.
As Australia's largest childcare centre operator, with over 400 early learning, kindergarten, and preschool centres across Australia under various brands, G8 Education offers a dividend yield of 5.38%.
While the broker appears to be positive about G8’s outlook, it remains cautious on CY25 given sluggish occupancy trends and the Point Cook incident which is likely to be an overhang on the company - and possibly the sector - until visibility improves concerning investigation outcomes and potential impacts.
Macquarie cut its CY25 occupancy forecast to 65.0% (from 65.7%), citing reduced growth expectations.
Taking a longer view, the broker also cut its forecast for CY26/27E occupancy to 70.5%/71.0% (down from 71.4%/71.9%) but still expects the abolition of the activity test on 1 January 2026 to be a material tailwind for CY26 occupancy.
While it’s unclear what damage the Point Cook incident will have to G8's long-term reputation or finances, other risks flagged by the broker included:
- Softer macro drives weak occupancy trends.
- Mandated wage increases with little to no government subsidisation.
- Cost inflation exceeded their forecasts.
- An inability to exit underperforming centres.
Overlooked
Given their limited market cap, the three other ASX-listed pure-play childcare centres, Embark Early Education (ASX: EVO), Mayfield Childcare (ASX: MFD) and Nido Education (ASX: NDO) also tend to fly under most investors' radar.
After selling its NZ centres (around 100) after the pandemic, relocating across the Tasman and listing on the ASX, Embark Early Education – whose CEO is Chris Scott, founder of G8 Education – has ramped up acquisitions throughout Australia.
Two months ago the company announced the acquisition of two new centres, bringing its total number of childcare centres to 40.
Like its peers within this boutique sector, Embark appears to have been oversold and offers a dividend yield of 8.57% which is likely to appeal to investors looking for passive income within a falling interest rate environment.
