Think Childcare Limited (ASX:TNK) is emerging from the recent volatility of the early childcare sector as a premier brand in the Australian sector. At the helm of this success is Mathew Edwards, who serves as CEO and managing director of one of Australia’s leading early childcare networks.
Headquartered in Drummoyne, New South Wales, the company has grown from 12 initial centres to 80 facilities owned and managed that provide long-day care to children ages six weeks to six years. More than 1,500 educators work between 6 a.m. and 6 p.m., five days per week, delivering about a million days of learning and care each year.
Edwards brings a wealth of experience to the table. After operating a multisite retail group that he started from the boot of his car and grew into a publicly listed company, he moved on to managing a group of childcare centres in the early 2000s. Under the Think Childcare banner, his strategy is to acquire underperforming childcare centres, identified by a strict acquisition criteria. He then integrates them into the Think Childcare network. Consolidating marketing and compliance programmes relieves the administrative burden at the centre level, which optimises performance and increases occupancy to boost profitability.
After acquiring holdings from the failed ABC Learning Centres, Think Childcare launched its first listing on the Australian Securities Exchange (ASX:TNK) in 2014 with a plan to revitalise underperforming centres into strong trading groups. Edwards has successfully achieved his goal in just four years with the company building up $78 million in total assets and delivering an overall shareholder return of 19% compared to the ASX300 Accumulation Index of 11.9%, according to its latest annual report.
Banking on a Long-Term Investment in Childcare
“Think Childcare has grown up in full view of the public as a public company,” says Edwards, who is proud of how his company has weathered the sector’s strong headwinds. Less than two years ago, key operators in the industry, including Think Childcare, experienced a significant 25% drop in share prices due to oversaturation and stagnant enrollments. However, the future is looking brighter, reassuring Edwards that childcare is a smart long-term investment.
Driving steady sector growth during the past year are the recent regulatory reforms that now allow the government to heavily subsidise the cost of childcare. Currently, the funding provides families with up to 85% of $120 per day. With government payments being issued every Tuesday, the subsidy system now underpins Think Childcare’s revenue. Enrollments are also increasing as more affordable childcare options become accessible, prompting mothers and low-income families to return to the workforce.
Another boost to growth comes from the Australian Department of Education’s extension of Commonwealth preschool funding. The 2019-20 budget earmarks $453.1 million for the National Partnership on Universal Access to Early Childhood Education to ensure that 350,000 children engage in a quality preschool programme for 600 hours before starting full-time school.
During this industry downturn, Think Childcare pivoted. The company pledged a $3.1 million capital investment to significantly improve its quality of care offerings, elevate marketing efforts, streamline operations and strengthen human resources. One of the company’s most aggressive positions was acquiring the premium childcare brand, Nido Early School, in 2017 to transform how it delivers childcare.
“It’s actually slightly more expensive to deliver that care, but being best in market ensures that you have a higher occupancy, and therefore, a higher profitability,” says Edwards, who anticipates all centres will be fully transitioned into the Nido model by the middle of next year.
Edwards believes that the earnings cutback this year, which was used to fund the new platform, is an essential part of delivering tomorrow’s growth. “We are making the decision to build a company for the long-term,” he explains. “We always operate on the premise that every decision we make is in the long-term interest of building a stable and predictable business. Obviously, we expect that to literally pay dividends for many years to come.”
Think Childcare is also shifting strategies in its target demographics by moving away from more affluent, higher-density areas to fill the void for high-quality care and education in the outer suburbs. Not only is this an untapped market, Edwards notes, but higher subsidies are typically paid to families living in these areas.
“The theory is that most families in the outer suburbs are aspirational,” Edwards says. “They have a desire for their children to have a better life than they had, so they are certainly seeking a higher-quality offering. We’re probably the first organisation to really focus on that quality piece.”
Implementing a Forward-Looking Growth Plan
Moving forward, Think Childcare expects its growth to stem from three key areas. A central approach is to expand its network of centres across Australia through acquisition. Edwards describes the company as a lease-hold operator working closely with various developers around the country. This ranges from small developers producing two or three centres each year to larger national developers.
“We have a very unique model where we develop childcare services with incubator partners and develop some services internally,” Edwards explains. “We manage those childcare services until they trade up to our bankable metrics, which is around 75% occupancy and at a certain profit level. We can acquire those centres off our incubator partners at four times earnings. We have minimal integration risk. As far as everyone is concerned, from day one, it’s a Think Childcare service under a Nido brand.”
The company has also started to enjoy some economies of scale, Edwards notes, as the operational and educational transformations come to a completion. “That will see us be able to operate at scale in the future. In hindsight, it’s probably something we should have done prelisting, but it’s something we are actively invested in now.”
“Interestingly, we are the first listed childcare operator to actually invest a large amount of capital back into our existing businesses,” says Edwards, who revealed that Think Childcare is investing up to $7 million to upgrade all its centres to best in market status. He is banking on the integration of the Nido philosophy as being the company’s key differentiator in a fairly homogenous sector. Like most operators in the market, Think Childcare first launched as a typical run-of-the-mill childcare service, he admits. “It was honest, good childcare service, but there was no differentiator in terms of our service delivery. When you do that, you just get your share of the market. When everyone is at 70% occupancy, you are at 70% occupancy.”
He defines Nido-quality service as “an exceeding quality of care and education,” which he believes drives parents’ decisions in childcare. “We are certainly a place of education as opposed to just a place of care. The word care is a critical piece, but it’s a place of education,” he says. The Nido curriculum is play-based to inspire curiosity for learning and nurture a love for learning. The school readiness curriculum meets standard educational outcomes, but it is also focused on building resiliency.
“What families are looking for is to ensure that we help prepare a child for the rest of their life, that we allow them to be little, that we build resilience into a child’s makeup and we provide an environment full of love and caring,” Edwards says. “This ensures a child has a love of learning that carries them through the rest of their life.”
“It’s important for investors to understand that we are building something that is built to last,” he stresses. “We are steadfastly driven on building a robust business and always ensuring we’ve got a balance between operational risk and acceptable debt exposure. We certainly see the best years for the sector and for Think Childcare still ahead of us.”
Find out more about Think Childcare (ASX:TNK) by visiting www.thinkchildcare.com.au.