Current Price: A$1.51
Offer Price: A$1.75
Upside: 16% (+113% eventually realized)
Expected Closing: TBD
This idea was shared by Dan.
Australian childcare services provider Think Childcare has recently received preliminary takeover interests from two parties. The first non-binding proposal came at A$1.35/share from Alceon Group (private equity firm with US$2bn AUM) and another one, week later (23rd Nov), was an overbid from a childcare group Busy Bees at A$1.75/share. The company is still reviewing the proposals without any further updates released so far.
Although the situation is still in rather early stages, there are several aspects that make the proposals (especially the Busy Bees one) particularly interesting:
- There is a substantial chance that the offer from Busy Bees (at A$1.75) could go through. Busy Bees is a strategic buyer, which currently owns over 660 childcare services across the globe including 65 services in Australia (vs 86 owned by TNK). Busy Bees entered the Australian market in 2018 through the acquisition of 30 nursery centers and doubled the number of centers since then. The group is certainly aiming for global expansion and has recently made several acquisitions worldwide: Sep’19 – entered the US market and made further acquisitions in Italy, Jan’20 – UK, Feb’20 – another acquisition in the US. TNK, which showed relatively impressive performance during the pandemic and expects substantial growth in the next 3 years, seems like a decent fit for expansion in Australia. The financing is not in question, as Busy Bees is backed/owned by a large Canadian pension fund ($204bn net assets as of mid-2020). So far it’s not clear if approval from FIRB (foreign investment authority) will be required, however, given the size of the acquisition, there should be no issues with the regulator. Media reports indicate that a firm proposal could be announced before Christmas.
- Both offers come at an opportunistic timing and just a few weeks after TNK has substantially increased its CY2020 guidance. The new guidance indicates a strong rebound from the COVID impacted H1’20 performance with attendance and enrolment at the majority of the centers at or above pre-COVID levels. These positive trends are expected to continue going forward. The company has also announced new underlying EBITDA guidance (A$22-A$23m), which is significantly above 2019 levels (A$14m) and above the previous guidance (A$15-A$17m). Most of the improvement was due to organic growth.
- Busy Bees price comes at 6.6x CY2020 EBITDA guidance and 10.5x 2019 EBITDA. Comparison with 2019 peer results and performance during 2020 indicates that the price has headroom for improvement. In 2018 the company has done an equity raise at A$1.99/share (by issuing 9% of shares). Buyers might need to raise the price to this level in order to incentivize more shareholders to accept the offer.
The downside to pre-announcement stands at A$1.25/share (-17%). However, given the recent interest from two credible buyers, which clearly state that the company is worth more, I expect the eventual downside to be lower. Meanwhile, there is additional upside from potential bidding.
Given that CY2020 guidance of peers was not available, the relative comparison of 2019 results is provided in the table below:
The proposal comes at 10.5x 2019 EBITDA vs peer valuation of <7x, which definitely doesn’t scream undervalued at a first glance. However, the company is growing fast, executes 10+ new center acquisitions per year (quite cheaply, see section below), and therefore has reported considerably better 2020 performance than its peers’. H1 results showed revenues increasing by 3%, underlying EBITDA up by 24%, and NPAT up by 63% YoY, whereas TNK peers reported significant losses on all metrics. Moreover, in November the company has increased its CY2020 underlying EBITDA guidance from the previous A$15-A$17m to A$22-A$23m, considerably above the $14m generated in 2019. Whereas, the projected profitability of its peers seems to be just in line with 2019.
Of course, some of this growth was non-organic and achieved through M&A. During H2’19 the company acquired 15 new centers. 11 of them were expected to generate $4m underlying EBITDA in CY2020, so assuming the remaining 4 had similar profitability, the acquired EBITDA was supposed to be (without the pandemic) at around A$5.5m. This year in August TNK acquired another 6 new centers with an annual EBITDA of A$1.25m and 4 more in November with an annual EBITDA of $2.1m (the effect from these latest acquisitions likely had no/minimal impact on the improved EBITDA guidance yet). So overall it seems safe to assume that given the COVID-19 impact and excluding H2’19 and 2020 acquisitions the adjusted CY2020 guidance would stand at around $16m-$17m, which is still a 13%-19% improvement over 2019 results.
TNK had higher occupancy levels during H1’20 – it was 80% vs 69% at GEM and 62% at MFD (CY2020 guidance is just 67%).
YTD stock price performance also suggests TNK stands out among its peers – TNK pre-announcement price was at pre-COVID levels (12th Feb), while GEM is down 32% and MFD decreased by 19%.
Adding up all these points, it seems that the premium valuation of TNK is justified, while at 6.6x CY2020 estimated EBITDA multiple, there is some headroom for a better offer as well.
Some more highlights on peer performance:
- H1 occupancy was 69% vs 80% for TNK.
- H1 underlying EBITDA fell 36%, NPAT decreased 56% YoY. Revenue was down 28% YoY.
- In November the company has provided an update showing YTD (10 months) underlying EBIT at A$98m compared to A$132m CY2019.
- During the year the company has also made a large dilutive equity raise of $300m priced at A$0.80/share (vs pre-covid A$2.00/share and current A$1.20/share).
- H1 occupancy was 62%, while full-year guidance stands at 67%.
- H1 revenue fell 43%, EBITDA 32% and NPAT 41% YoY.
- By the end of October, the company provided full-year EBIT guidance at A$5.6-A$5.9m vs $5.9m in 2019.
- NPAT guidance stands at A$3.8-$3.9m vs $3.3m last year.
Think Childcare Group offers child care services in Australia and is also engaged in management and consultancy services to third parties or incubator partners. TNK owns and manages 74 centers under the Nido brand name.
In 2017 the company has moved away from acquiring new centers on the market to developing their own services or acquiring them from third-party incubators. Acquisitions criteria is 75% utilization rate and $250k+ EBITDA.
The company acquires the new services rather cheaply (4x EBITDA) and then continues to grow them, improving the utilization rate/occupancy and profitability. Effective multiple (purchase price and earn-out/LTM EBITDA) of the services acquired in 2018 is now significantly better vs the 4x multiple made at the time the center was purchased:
In 2020 August, TNK has acquired 6 new Nido centers + 4 further pipeline services (for further development). In November, the company has acquired 4 more Nido centers, including 2 from Think Childcare Development and 2 from third-party incubators.
Currently, the company has 51 more new childcare centers (half from 3rd party incubators) in the pipeline worth over A$100 ($25 EBITDA), which it expects to acquire in the next 3 years.
In 2018 the company raised about $10m equity at A$1.99/share (to fund further purchases of childcare services). It issued about 5m shares (8.6% of the current shares outstanding). In 2019 it raised A$18m at A$1.58/share selling 11.5m shares (19% of current share capital).