G8 Education Ltd (ASX: GEM) shares are falling after the childcare operator announced its payroll underpayment costs.
Trading update
G8 revealed that its occupancy and attendance is recovering well with current like for like (LFL) occupancy at 75.5%. The occupancy is currently lower by 4.5% than last year, which is 5.5% percentage points better than the April low.
The childcare operator has been focused on cost management which, together with significant government support, has allowed the business to invest in key areas such as in-centre resources and repairs and maintenance in the fourth quarter.
In the 2020 calendar year to date to 30 November 2020, underlying EBIT (EBIT explained) has been $98 million. That figure includes current year wage costs relating to its employee payment remediation program.
Remediation program costs with respect to prior financial years will be addressed by restating its older accounts. Total one-off costs for this remediation is presently estimated to be in the range of $50 million to $80 million, pre-tax.
G8’s wages and rostering systems and processes are being amended to ensure compliance. This is scheduled to be fully implemented by the end of the first half of 2021.
The non-compliance with the relevant remuneration awards mainly related to overtime, minimum engagement periods and agreed hours of work and allowances. This may have affected approximately 27,000 staff.
The remediation will be funded from existing cash reserves.
G8 CEO Garry Carroll said: “The Group deeply regrets that these pay errors have occurred. We apologise unreservedly to any affected team member. As soon as we identified and quantified this issue, we initiated a remediation program to ensure they will be paid every dollar they are owed.”
Outlook
G8 said that it’s still looking to optimise the portfolio and sell previously impaired childcare centres. It’s also going to keep working on its profit improvement program and roll out new greenfield centres using its revised investment model. It’s expecting to open 10 new greenfield centres in 2021 for a capital outlay of $4 million. Startup losses in 2021 are expected to be $4 million.
2021 is expected to be a recovery year due to the ending of additional government subsidies and the ongoing impacts of COVID-19.
Whilst G8 is one of the best in the industry, it’s a tough business to do well in. Supply and demand is constantly an issue and it’s quite reliant on government support. For me, there’s other ASX shares I would rather buy. For a child-related idea, A2 Milk Company Ltd (ASX: A2M) shares could be a better long term growth idea.
