What’s Up With G8?

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Earlier this week G8 Education (ASX: GEM) jumped 6%. The rapid rise in share price was in large due to the early release of the proposed changes to childcare. The changes revolve around the replace of current subsidies with a new “Child Care Subsidy”. The Government estimates that this will increase the involvement of more than 240,000 families in paid employment and therefore a much larger demand for Childcare.

For families earning less than $65,000pa the subsidisation rate is increased 10% and they will be eligible for additional support through the Child Care Safety Net. The Safety Net provides up to 24 hours per fortnight of subsidisation regardless of whether they pass the activity test.

For families earning from $65,000 to $170,000 they can expect to be save $30/week (on current estimates).

The new benchmark rate (fee) would be $11.55/hour. This is greater than the current bench mark of $7.41 and GEM’s current fee of approximately $7.91. We would suggest this leaves some room for price rises with little to no impact on the clients pockets.

Activity tests will be tightened so those who don’t complete sufficient work may lose their place (and 48 hours of care per fortnight). This measure seems to be to assist in creating room for those working over those not.

All up, the proposed measures are good. They should assist families meet their childcare needs and return to (or increase the amount they) work. In turn, it would be reasonable to expect that the demand for Child Care would increase.

Given that the profitability of Child Care is driven by occupancy rates increased demand will only help drive profitability in the industry. Coupled with the potential for future price rises, it becomes easy to see why GEM’s price rose so quickly. If these proposed changes are supported in Parliament then I’d expect more price activity for GEM.

Disclaimer: Please note this is for general information purposes only and is not intended to be advice. Please consult your financial adviser or stock broker prior to taking any action on this article. Accession3 Financial Advisers. ABN 72 840 807 122 AFSL 331990