Criterion: Childcare abuse allegations overshadow value in struggling listed sector
A dwindling birth rate is contributing to the first post-pandemic supply glut
Growth drivers include the government abolishing the work activity test for the childcare rebate
Not surprisingly, the dozens of child sex abuse charges levelled at a former Melbourne childcare worker have seen parents questioning whether their offspring are safe.
The accused, Joshua Dale Brown, faces around 70 charges pertaining to his time at multiple centres over the last eight years.
For the childcare operators, the repercussions are intense scrutiny and likely bolstered regulation.
For investors, it's time for a deep breath as the course of justice takes its place.
One question is whether parents will stop using childcare, especially when they work and have little choice anyway.
Bear in mind the sector already faces wider scrutiny about serious lapses: anything from lax hygiene to runaway kids to staff underpayments.
Under pressure
Brown's alleged crimes have exacted the greatest share price toll on G8 Education (ASX:GEM), by far the biggest of the four ASX-listed childcare exponents.
Reports of three families lodging a civil claim against G8 have compounded the initial shock.
Brown worked at two G8 centres at Point Cook in Melbourne's west.
G8 says it will implement measures including rolling out closed circuit cameras across all its centres.
After the outcome of the criminal proceedings, the company will commission an independent review to 'inform further changes'.
G8 shares have tumbled around 23% since police charged Brown at the start of the month.
The shares in the other listed childcare exponents – Mayfield Childcare (ASX:MFD), Nido Education (ASX:NDO) and Embark Education Group (ASX:EVO) – have lost around 13%, 4% and 3% respectively.
Baby bust curtails demand
Childcare supply has outstripped demand for the first time since 2021.
On the demand side, even Big Ted could work out that more babies would help.
According to KPMG Australia's analysis this week, Australia's birth rate recovered 2.6% to 292,500 in 2024. But the rate is still 3.8% below the 2019 pre-pandemic level of 304,000.
The fertility rate stands at 1.51 per female, well below the replacement rate of 2.1.
Separately, broker Canaccord estimates that in 2025 there are likely to be 8000 fewer kids enrolled, a 2.8% decline.
The firm expects 400 centres to open, taking the national complement to 9463 centres (up 4.3%).
Brighter times in the sand pit?
But a deeper dive into the sandpit doesn't necessarily paint a gloom-and-doom picture.
In the short term, the dwindling birth rate affects the baby rooms. These are less profitable than the older 'kindie' rooms because of a higher staff-to-child ratio.
From January 2026, the feds will abolish the 'activity rule'. This means parents don't have to be working or studying to be eligible for childcare subsidies for three days a week.
They may just want a break from their billy lids and who can blame 'em?
Canaccord estimates the change will create $1 billion of extra subsidies, thus generating 2-5% of additional demand.
Meanwhile, the Reserve Bank's rate cuts to date have provided cost of living relief.
This week's spiky unemployment number suggests there are more to come, despite this month's surprise pause.
Today's lesson is: resilience
Given the travails, the performance of the listed operators hasn't been that bad.
With G8, Macquarie Equities expects a net profit for the year to June 2025 of $69.4 million, rising to $78.5 million in FY26.
G8 on April 20 reported a year-to-date occupancy decline of 3% across its 400 centres. But from February, the decline had abated to 1.9%.
In calendar 2024, Nido overcame staffing issues to turn a previous $14.9 million loss into a $19.5 million profit, with revenue climbing 74% to $166 million.
While the sex abuse charges are likely to continue to weigh on the sector, the shares look keenly valued on earnings multiples of ten times or less and yields of 6-9%.
(In recovery mode under a new CEO, Mayfield is the exception having posted only a token profit last year).
Alternatively, property trust Charter Hall Social Infrastructure REIT (ASX:CQE) owns a swag of centres accounting for 74% of its overall $2.1 billion portfolio.
Key tenants are the not-for-profit Good Start – the country's biggest childcare operator – and G8. The average weighted lease is 11.9 years.
Landlords are a step removed from changing the nappies and cleaning snot from the walls.
Whatever the case, investors shouldn't throw out the baby with the bath water.
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