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Why the G8 Education share price crashed 23% lower in November

James Mickleboro
Share price plummet

The worst performer on the ASX 200 index last month was the G8 Education Ltd (ASX: GEM) share price.

The childcare centre operator’s shares ended the month with a decline of ~23%.

The next worst performers weren’t too far behind G8 Education. Both Smartgroup Corporation Ltd (ASX: SIQ) and Nufarm Limited (ASX: NUF) recorded declines of just over 20% during the month.

Why did the G8 Education share price crash lower?

Investors were quick to hit the sell button last month following the release of a trading update at its investor day event.

As you might have guessed from the share price reaction, trading conditions have been tough for G8 Education.

The company had been targeting like‐for‐like occupancy growth in the “mid 1% pts” in FY 2019.

However, as of its update, year to date occupancy was currently 1.2% points ahead of the prior corresponding period and trending lower. This is due to childcare centre supply being greater than previously forecast.

Unfortunately, with things unlikely to improve in the near term, management warned that full year occupancy growth was likely to slide to 1%.

Whilst this might not sound like much of a difference to its target, it has a major flow-on effect to its earnings. Especially with its wage growth expected to come in $3 million ahead of forecast.

In August management forecast underlying EBIT in the range of $140 million to $145 million in FY 2019. This has now been downgraded to the range of $131 million to $134 million following the slowdown in occupancy growth.

Should you buy the dip?

At 12x estimated full year earnings G8 Education’s shares look reasonable value.

However, I’m not in a rush to invest as I suspect that the tough trading conditions it is experiencing will stick around for some time to come.

As a result, I think its performance may underwhelm over the medium term and better options are available elsewhere.

The post Why the G8 Education share price crashed 23% lower in November appeared first on Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019