Eyes are on Evolve Education for its Aussie foray. Photo / 123RF
Eyes are on Evolve Education for its Aussie foray. Photo / 123RF
COMMENT:
Kiwi businesses crossing the ditch can never assume an easy ride.
These are lessons learnt by countless Kiwi firms such as The Warehouse and MetroGlass, and now eyes are on Evolve Education for its Aussie foray.
When Gold Coast-based entrepreneur and new managing director Chris Scott fronts investors atthe childcare roll-up's annual meeting later this month, some good news about Australia will be expected.
Having raised $63.5 million in May at a steep discount, Evolve has $25m earmarked for 12 centres across the Tasman.
While lacklustre results from Evolve's 120 centres New Zealand may make investors wary of the expansion, Scott has significant experience since founding ASX-listed G8 Education which owns more than 470 centres across the ditch.
Scott now has a 33 per cent share of the Evolve through the May bookbuild, after initially paying $13.1m to take an 11 per cent share of the company from Lollipops founder Mark Finlay. The former All Black had lasted eight months as chief executive, much of which he spent trying to sell the business.
Finlay's replacement Roseanne Graham lasted 13 months.
The fact that Scott is the third boss in as many years hasn't gone down well with its 1,300 shareholders. The share price has dived to just 9.6 cents since it listed in 2014 at $1 per share.
Management just hasn't been able to get it together. In May, Evolve reported underlying earnings before interest, tax, depreciation and amortisation of $13.3m in the year ended March 31, down from $21.6m in the prior year, a 38 per cent plunge.
The sector's key metric, occupancy rates, has slid to 76.5 per cent this financial year, down from 78.6 per cent the year before and 81 per cent the year before that.
The business model is very sensitive to changes because of its fixed cost base and the expense of heavy staffing. One industry executive told BusinessDesk an occupancy rate anywhere south of 80 per cent is "uncomfortable", and Evolve has had to sell out of some of its portfolio because of this.
The challenges only seem to be mounting as funding in the 2018 budget of $590m over four years was described as "underwhelming" by the Early Childhood Council, which pointed out a 1.6 per cent increase in funding would do little in the face of teachers demanding a 16 per cent rise in pay. This year's budget nudged it up a modest 1.8 per cent.
In Australia about 66 per cent of children attending a long daycare centre are attending private institutions. Photo / 123RF
Stepping back, the problem is the company can't hide its issues.
Daycare centres could be contrasted with age care providers which can ride high off property valuations. The challenge is in the sale-and-leaseback model Evolve adopted when it first amalgamated.
For example, Lollipops, which was part of the Evolve roll-up, had weathered the challenges of the sector through property ownership which rode it through the GFC.
In the highly fragmented industry, it's hard to find comparable competitors, but in contrast BestStart Educare operates a mixed ownership model over its 260 centres, which provide it with 7 per cent market share to Evolve's 4 per cent.
BestStart had claimed corporatisation was too hard when it went private back in 2007. It is now a charity which gives it tax-free status.
It appears Evolve is not alone in its struggles, as BestStart's accounts to March 2019 show a 17 per cent decline in ebitda from $34.5m to $28.5m.
What could save Evolve are Scott and new board member Chris Sacre (who owns about 6 per cent of the stock), also formerly of G8 Education. The pair has moved onto the board as both Alistair Ryan and founding member Norah Barlow depart, which may signal big changes. Former Auckland business lobbyist Kim Campbell's appointment will be voted on at the meeting.
Scott and Sacre are experienced in the Aussie education market which unlike New Zealand boasts multiple listed players and the corporatisation of the care of children is not as dimly viewed by parents.
"The Australian community is more receptive towards ECE as a commercial enterprise, I don't know why that is but in New Zealand it's perceived quite negatively," a former Evolve executive said.
In Australia about 66 per cent of children attending a long daycare centre are attending private institutions.
Add to this the fact that in Australia, government spending on childcare is up 137 per cent in real terms, while the growth in number of children rose by 15 per cent over the period 2007 to 2016.
There's also plenty of room to grow in the Australian market, but there's been nothing but promises from executives trying to turnaround New Zealand.
And local investors will be cautious given G8's initial rise tempered after it grew too quickly and contributed to an oversupply of centres a couple of years ago – something from which it's still recovering.
An Australian play might not solve all Evolve's problems, but it could be a start.
