As part of the Reach Markets Research Portal, we provide investors with access to the analysts who released more than 100 research reports as part of reporting season.

One investor – Barry – sent in this question: I have held a significant shareholding (>100K) in GEM for some time anticipating a return to price levels above $4. My break even is just above $3. Is a return to these levels likely even in the medium to long term?

Our Analyst responded:

Whilst it is hard to envisage at this stage, we do believe the long-term outlook for the company is positive. Having said that near term risks are elevated, which will impact the share price (evidently already has in our view). Some of the recent weakness in the share price can also be explained by the stock going ex-dividend on 13-Sept and Global Tema Criteria  Fund (Sweden Global Fund) selling 4 million shares (exiting its position). Some investors may be losing patience as the balancing of the supply/demand question (main source of industry pain at the moment) gets pushed out. GEM’s  management noted supply has started to moderate with encouraging signs it may be more balanced by mid to late 2019 – some expected this to be late 2018/early 2019. The pipeline of firm/commenced development applications (DAs) are forecast to moderate. Having said that, market conditions are expected to remain challenging over the coming 12 months.

The other driver causing a bit of disruption to the industry is the recently introduced government subsidy.  Management recently noted that, as expected, the new rules coming into effect 1 July 2018 (providing additional $3.5bn to the early learning sector) has caused disruption. With those not meeting the requirements dropping off but management also seeing a healthy pick up offsetting these, pointing out “…probably did have some parents reducing their days and also some leaving our centres. They were actually more than offset by new parents and parents increasing their days, as we had good levels of occupancy growth in July and August”

Long-term we remain interested for the following reasons:

1. Government funding should provide some support;

2. Call centre pilot is showing encouraging signs with improved occupancy and conversion rates;

3. The supply / demand equation can only be pushed so far before it becomes untenable (in this scenario large operators with scale have some advantage weathering the storm).

Whilst we do not focus on external views, it is worth highlighting the stock is a consensus buy at current levels, with average price target of $2.48 (+26% upside).

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