Think announces creation of new incubator in mixed half year results
Think Childcare (TNK) have today as part of their half year 2019 results announcement confirmed that they will be creating a newly incorporated entity to act as the developer and incubator of Greenfield sites on behalf of Think.
The proposal will provide TNK with the means to create its own “in house” Greenfield site pipeline, as opposed to the current model that sees the vast majority of new centres sourced from third party incubator partners and comes in the wake of news that the company’s largest incubator partner, Edhod, had been placed into receivership in early June.
In addition, Think reported half year results which fell slightly short of expectations, as enrolment in May and June at its centres purchased prior to 2018 underperformed.
New incubator strategy to “secure” future growth for Think
Think Childcare Development Limited (TND), the new company, will initially be seeded with assets through two separate transactions that combined will add 18 new sites to the overall TNK pipeline.
The first transaction will see five services under construction and two services with pre development approval purchased from entities associated with Mathew Edwards, Chief Executive Officer of Think, for approximately $5m.
The consideration will be paid in TND shares.
The second transaction will see three services under construction, four services with service approval and three services pre service approval purchased from a group of third party developers.
The 18 services are located across Western Australia, South Australia and Victoria and will be constructed as “Nido” services to be delivered into Think on completion.
Innovative “staple” structure underpins strategy to create separate entity
TND, the new development entity, will be separately incorporated but the ownership structure will replicate that of TNK, with the two companies bound together by a “staple structure” that means the shares of each entity cannot be traded separately.
The newly created stapled group would effectively have two stock market listings, TNK and TND, but any investor buying or selling shares in either company would also be purchasing/selling the shares of the other.
By using a structure of this nature, TNK will have created a clear line of separation between its child care operations function (TNK) and its development function (TND) but sufficient proximity to ensure that TND is trading as expected and new sites will be forthcoming.
In addition, by creating a separate entity for the development activities, TNK is able to quarantine development risk, source separate financing arrangements to finance development, and create a high level of visibility into the entity itself – a line of sight that has not been historically available with TNK’s previous incubator partners.
Shares in the new entity will be distributed to existing TNK shareholders on a one to one basis, coupled with a special dividend or capital return amounting to $6 million.
TNK to finance initial TND pipeline in initial stage and aims for 2020 EBITDA of $22m
TNK’s financiers have consented to allow TNK to use it’s own banking facility to loan funds to TND for the development of the initial pipeline, and also to finance the initial $6 million capitalisation of the development company.
TNK has sufficient covenant headroom to manage the extension of credit and, over time, would expect TND to replace these loans with project finance independently raised.
Finally, the combined entity is expected to generate somewhere between $21.0 million and $23.0 million of underlying earnings before interest, tax, depreciation and amortisation (EBITDA), up from previous expectations of Think on a standalone basis of around $19 million.
Lower occupancy at pre 2018 purchased centres takes shine of EBITDA performance
TNK reported half year underlying revenues of $47.9 million, an increase of 14.0 per cent from the same period last year and EBITDA of $4.3 million up just 1.7 per cent on the previous year.
The underlying EBITDA performance, although benefitting from a 7 per cent increase in fees, was impacted by a weaker than expected enrolment performance in its like for like portfolio of about 3.6 per cent that developed in the last two months of the half year period.
The company did note that the lag was most likely a result of tough prior year comparatives that saw enrolments boosted by a discounting campaign in the months of May and June 2018. Enrolments have recovered somewhat since the half year ended.
Cost deferrals and business momentum to underwrite 2019 profit guidance
The company confirmed that they still intend to generate between $13.8 million and $14.8 million of underlying EBITDA in the year and have announced that they will defer the filling of new roles, seeking instead to promote from within and put a hold to uncommitted Project Elevate activities until CY 2020.
These actions combined with the planned acquisition of six new services, five of which will be delivered by incubator partners, and a newly introduced set of objectives and key results linked to senior leadership team remuneration report outcomes will serve to underwrite guidance.
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