Stocks to Benefit from Old Child Care Subsidy Coming Back into Action 

Summary

• In early April 2020, the Federal Government announced fee-free child care for families in the wake of COVID-19.
• JobKeeper wage subsidy for the sector due to end soon, while Child Care Subsidy and Additional Child Care Subsidy to start again from 13 July.
• GEM has enhanced liquidity and reduced expenditure to withstand the economic downturn as well as pursue any opportunities that may emerge from the challenging period.
• TNK highlighted the transition payment as a safety net for revenue, assisting the sector in planning for the future.

Pandemic situation in several Australian states seems to be under control; however, the recent cases of infections, especially in Victoria, are threatening the economic recovery. Australia restarted the economy much before than anticipated, which currently seems to be faring well in the international context. But rising fear related to the second wave of infection has further increased conundrum around the economy.

On 23 March 2020, the nation went under strict lockdown, which had an impact on child care centre operations. On 2 April, the Government announced new protocols for the early childhood education and care (ECEC) sector.

The new rules were emergency steps to help families during the coronavirus (COVID-19) pandemic and also to handle the impact of pandemic on child care enrolments and attendance. As per the new arrangements, child care services became fee-free for families, effective between 6 April 2020 to 28 June 2020.

The JobKeeper subsidy for the child care sector will end soon, but the providers will get a 'transition payment', equal to 25 per cent of the fee levels of centres before the pandemic.

The Government has announced that from 13 July 2020, Child Care Subsidy (CCS) and Additional Child Care Subsidy will again be implemented. If child care services are accessed between 6 April and 12 July 2020, there will be no requirement to pay any fees for child care.

In that backdrop, let us discuss two ASX-listed companies in the related space.

G8 Education Limited (ASX:GEM)

With 470 plus early learning centres across 21 quality early learning brands, G8 Education operates as one of the leading players in Australia engaged in providing quality early childhood education and care.

During mid-June 2020, the company held its annual general meeting, highlighting that the pandemic had an impact on the centre's attendances, and by end-March 2020, attendances across the sector reduced by approximately 50 per cent of those experienced in prior years.

The company stated that given the risk to the sector, the Government announced the initial sector-specific relief package in April, aiding centres with certainty of revenue, helping them to remain open during the pandemic peak. On 8 June, the Federal Government announced an updated version of the initial relief package with a transition phase package of support due to come into play from 13 July.

As per GEM, these packages recognise the sector significance, its crucial role in the social, cognitive and emotional development of children, and contribution towards the economy.

After the Federal Government's announcement of initial sector relief package, GEM raised AUD 301 million through an underwritten institutional and retail entitlement offer. The capital raised enhances the liquidity to support GEM through the prolonged economic downturn and offers the flexibility to pursue any opportunities that may come out of the challenging time.

Response to COVID-19: GEM implemented a COVID-19 response team and ensured the health and safety of staff, children and their families, in addition to continuity of operations.

Safety measures and strict hygiene rules across all centres and work from home arrangements were implemented wherever possible. GEM maintained regular communication with staff and families, especially about social distancing and hygiene awareness and wellbeing initiatives. G8 provided information platforms and online learning to assist parents in keeping children engaged.

For business continuity, GEM first established a governance structure to steer the company through the pandemic. Secondly, the liquidity was enhanced to survive the downturn and last but not the least; expenditures were reduced.

Going by the level of uncertainty, GEM decided to defer non-critical projects, which reduced capital expenditure for the 2020 financial year from AUD 40 million to AUD 25 million.

The company decided to delay the payment of CY19 final divided to October 2020, while reducing Director fees and Executive Leadership Team’s salary by 20% for a six-month period.

G8 Education is due to release half year results on 24 August 2020.

Do Read: Education Stocks Amidst Ongoing Reporting Season: GEM, IDP

On 30 June, GEM last traded at AUD 0.890, up by 1.714 per cent from its previous close, with a market cap of AUD 732.11 million.

Think Childcare Limited (ASX: TNK)

TNK, which owns, manages and operates 78 long-day child care facilities in Australia, on 11 June 2020, provided an update related to the Federal Government's announcement on the Early Childhood Education and Care Relief Package and Transition Arrangements.

Transition Back to Child Care Subsidy (CCS)

• Child Care Relief Package is scheduled to end on 12 July 2020.
• Transition payment of 25 per cent of the average of last two weeks' revenue in February paid from 13 July to 27 September 2020.
• Jobkeeper for child care operators is due to end on 19 July 2020.
• Some families under certain conditions can receive an increase in subsidised care hours per week up to 50 hours until 4 October 2020.

Think Childcare unveiled that over the past few weeks, most of the staff returned back to the services and its workforce increased by 5 per cent. With the easing of lockdown restrictions, most of the children returned to school. TNK has 60 per cent of its services in Victoria, and it is the last state to have all students back to school for five days a week.

TNK is expecting an increase in base occupancy over the coming years, on the back of the economy reopening. According to the company, families that are enrolling now are fully aware that free care will be ceased from 12 July onwards, and TNK expects them to remain enrolled even after 12 July 2020.

Think Childcare highlighted that the transition payment offers a safety net for revenue and provides the sector enough time in hand to prepare for the new 'normal' in October 2020.

On 30 June, TNK settled the day’s trade at AUD 0.845, up by 1.807 per cent from its previous close, with a market cap of AUD 50.68 million.

Good Read: Childcare Stocks Amid New Policy Reforms