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The S&P/ASX 300 Index (ASX: XKO) stock G8 Education Ltd (ASX: GEM) may be a contender to deliver good returns, according to a lead portfolio manager from Wilson Asset Management.
G8 Education describes itself as one of Australia’s largest providers of quality early childhood education and care. It has more than 400 early learning centres across 21 brands.
As Oscar Oberg recently discussed in the Australian Financial Review, the childcare centre operator is an ASX 300 share that WAM is most bullish about.
Reasons to like the ASX 300 stock
WAM’s Oberg thinks G8 Education shares are the most undervalued by the market.
He acknowledged the company’s “struggle” with negative earnings per share (EPS) revisions and debt issues over the last decade. The company had even conducted a capital raising during COVID-19 in 2020.
WAM’s interest in G8 Education was piqued after the company appointed its new CEO, former BIG W managing director Pejman Okhovat.
According to the fund manager, Okhovat’s strategy for G8 Education was “relatively straightforward.” The company would aim to boost occupancy, stabilise costs, and divest underperforming childcare centres.
Oberg noted that G8 Education had a “very strong balance sheet” and could buy back between 5% to 10% of the shares on issue.
WAM’s research suggests this strategy can lead to the ASX 300 stock delivering organic EPS growth of between 10% to 15% each year over the next five years.
G8 Education share price valuation and upside
On WAM’s numbers, the G8 Education share price is valued on a forward price/earnings (P/E) ratio of 12 times, which Oberg described as “cheap”.
The fund manager believes the strong level of organic growth can deliver a re-rating to the G8 Education shares and raise the P/E ratio. It anticipates the G8 Education share price will have a “50% upside” in the next 12 to 24 months.
WAM’s positivity on the ASX 300 stock gives it a “large weighting” in the portfolio.
Oberg also had this to say about current economic conditions (courtesy of AFR):
Conditions are quite patchy, especially for small-cap companies. This financial year represents the third year in a row that small caps will underperform the Australian market.
We do think that the tide will turn as soon as we see interest rates decline, and we saw an example of this from December 2023 to March 2024 where small caps had a great period.