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Evolve shares fall 20% after profit warning

Monday 19th February 2018

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Evolve Education shares fell 20 percent to 60 cents after the early childhood education group gave its second full-year profit warning and said it is likely to write down goodwill on acquisitions and cut its dividend.

Net profit before one-time items is expected to be $11 million to $12 million in the 12 months ending March 31, down from previous guidance of $14 million to $15 million, the Auckland-based company said in a statement.  Profit on that basis was $15.9 million in 2017. Including a $3 million settlement with Inland Revenue over goods and services tax payable by its Porse business, net profit would be $8 million to $9 million, it said.

"Obviously it is another downgrade and the market is likely to treat it quite harshly," said Grant Williamson, director at brokerage Hamilton Hindin Greene in Christchurch, who added the stock could fall further over the session. He noted that the company has been accumulating new operations and "that takes a long time to bed down," he said. 

The earlier guidance had been contingent on meeting budgeted growth in net enrolments, particularly in the January to March period and that growth wasn't sustained into February, it said. Latest management figures showed that total like-for-like early childcare centre (ECE) net enrolments were 2 percent lower than in the same period last year.

“We had a strong start to the year with a surge in net enrolments in January, but this has tapered off in the past three weeks," said Mark Finlay, who was named interim CEO in August after Alan Wham left the company. "Essentially we have tracked just below 2017 levels whereas we were targeting a significant gain in child numbers."

He said there was "a wide disparity" in the performance of its ECEs around the country. Some were operating at full capacity with waiting lists and others hadn't attracted enough enrolments to make a profit. The company was reviewing the performance of its ECEs and "will be taking firm steps to improve overall performance through sensible rationalisation."

Given the prospect of lower earnings, Evolve now expects to pay a final dividend of 2 cents a share, down from 2.5 cents in 2017. The company said it will fund the settlement with IRD out of cash reserves. It previously had the $3 million in its accounts as a contingent liability.

Evolve has intangible assets of $212 million on its balance sheet, mainly goodwill from acquisitions of ECE centres and Porse. "At this time it is too early to conclude on the outcome of the impairment testing, as six weeks of the key enrolment growth period remains," Finlay said. "However, with enrolments for home-based childcare currently tracking below the same period last year, and in the absence of any signs of improvement, it is likely that an impairment may be required."

Evolve said any impairments "will have only a marginal impact on the overall financial strength of the company, and Evolve will continue to remain well within its banking covenants with substantial undrawn credit lines available to it."

Evolve shares have declined 39 percent in the past 12 months while the S&P/NZX 50 Index rose 14 percent.


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