All Research | EthicalEquities

How I lost my affinity for Affinity Education (ASX: AFJ)

Claude Walker — Tue, 25 Feb 2014 22:43:27 +0000

I’m going to keep it short and sweet. I’ve sold out of all my Affinity Education Limited (ASX:AFJ) because my thesis is broken. In my very recent article on the company, I compared Affinity Education to G8 Education Group. I wrote:

Maybe Affinity Education has bought the worst Childcare Centres on the market, or their centres are simply not as impressive as G8′s. Because of a relatively short history as a company, we just don’t know when it comes to Affinity Education.

However, I’m happy to hitch my wagon to the master of operations at Affinity Education, Gabriel Giufre. Ms Giufre has 14 years of experience working in childcare, is a major shareholder, and build up Eternal Echoes Pty Ltd, a company that sold its management rights to Affinity. She will be assisted by Ms Fiona Alston, who seems like the kind of person who will make sure that the childcare centres nurture their young charges. If these women deliver, I think Affinity Education will be rerated.

I can no longer support these propositions (they may be true, they may not be true). The sentence in bold is no longer true. This thesis is broken.

If you look around, you will realise you are at a website called Ethical Equities. It's called this for a reason. I seek only to invest in ethical companies: it is not unknown for companies on this website to be criticised by readers, after all everyone has their own ethics. I have been convinced that Affinity does not belong on this site.

Gabriel Giufre is married to one Samuel Christopher Giufre a.k.a Christopher Samuel Giufre. This fellow is currently being sued in Queensland. One of the people suing him has a litigation guardian (the other is Westpac). The court has not ruled on Chris Giufre's cases. He might be entirely innocent.

These facts prevent me having the level of confidence in the company that I previously had. Affinity Education is removed from the Hypothetical Ethical Share Portfolio at $1.50 (yesterday's close - I updated the old article yesterday to reflect this), and if you have a problem with this, I suggest you find out why somebody who requires a litigation guardian is suing him.

At any rate, none of this reflects whatsoever on Affinity Health, I just have particularly pedantic standards of risk management, plenty of fish in the ASX All Ordinaries.

This is the only mention Chris Giufre gets in the Affinity Education Prospectus [my bold]:

Gabriel Giufre holds an indirect interest in eight of the Managed Centres. Gabriel’s interests arise either as a result of her husband Chris Giufre being a director of a company that owns a Managed Centre, or companies in which Mr Giufre has a direct of indirect shareholding in turn owning shares in the owner of a Managed Centre, or Gabriel being a potential beneficiary under a discretionary trust, the trustee of which holds an interest in one or more of the Managed Centres. Gabriel does not have any active role in any of entities that own the Managed Centres.

-----

Affinity Education bought the management rights of 11 childcare centres from Eternity Echoes Pty Ltd, a company controlled by the Giufres. Eternity Echoes is a top 20 holder of Affinity Education. According to the prospectus, “The business assets of Eternal Echoes will be acquired for $1 million of equity with the majority of the acquired assets represented in goodwill.”

------

Affinity Education also bought a childcare centre from Bambini Early Childhood Development Boyne Island Pty Ltd, of which Gabriel Giufre is a director and shareholder. This acquisition was made with cash and shares. To quote the prospectus: “all but one of the Owned Centres will be receiving cash as consideration.” Incidentally, Chris Giufre is apparently the founder of Bambini Early Childhood Development. I found this presumably out of date information on Zoom.info:

"Chris also founded the Bambini Early Childhood Development Group in 2006, and is involved in all aspects of the business which include acquisitions, design, construct and supervision of operational management to develop prestigious childcare centres in Queensland. His focus is to manage the company's continued growth and prosperity by collectively directing affairs and guiding the organisations consistent profitability. Chris is actively implementing a vision targeting the niche sector set to challenge mainstream childcare to sustain a competitive advantage."

--------

The prospectus says:

"Affinity Education is acquiring the management business of Eternal Echoes (the Management Entity), which has operated and managed a number of child care centres since being founded in 2005"

----------

Here's some more publicly available info:

----------

-------------

So, I feel pretty bad about altering my opinion so quickly. Maybe share price will continue to go up... I think this business is about buying smaller businesses for, say, 4 x EBIT and then being priced on the market at 6 x EBIT, or whatever. It just goes to show that publishing a thesis is a great way to have it tested. Thanks.

The Author has no financial interest in Affinity Education. Nothing on this website is advice, ever. This post is for my own reference!

Is Affinity Education Group Ltd (ASX:AFJ) the next G8 Education (ASX:GEM)?

Claude Walker — Fri, 21 Feb 2014 00:44:04 +0000

Edit: This company has been sold from the Hypothetical Ethical Portfolio at the closing price of $1.50 on Tuesday 25 February. At the timing of writing, I sold half my real life shares at close, and it is likely I will sell the rest tomorrow. The thesis below has broken. I sold my shares and will not buy back. I've had hysterical emails in response to this post saying things like "Big, big, Big mistake...The hugest you will probably ever make. I would like to see you get any money back from these people." I don't appreciate the ramblings of people who have allegedly been badly burned by those involved with Affinity Education, if they do not even understand the basics of publicly traded shares. I was very promptly emailed about this company within 48 hours of publishing the thesis below, I have done further research and sold my shares. If you have been burned by these people, feel free to not send me abusive emails. The first emailer was very helpful and polite - if you can't be those things, go vent your frustration elsewhere.

So I was a little slow in bringing Affinity Education Group Ltd (ASX: AFJ) to the attention of readers. The shares have broken new highs today, continuing a (lucky) run of outperformance for my personal portfolio that I never dreamt of and truly hope will be repeatable.

Affinity Education owns 57 childcare centres, and manages another 11. The company has been rolling up childcare centres for the last year, and was listed on the ASX at $1 per share in December 2013. The prospectus forecast pro-forma revenue for the six months ending 30 June 2014 to be $37.7 million. The company expects revenue of $43.6 million in the six months leading to 31 December 2014. The prospectus projects NPAT of $7.8 million for the 12 months ending 31 December 2014, putting the company on a forward P/E ration of around 17 at the current price of $1.45 per share.

I bought shares in Affinity at $1.40 based on a simpleton comparative analysis with G8 Education (ASX: GEM), which owns 233 centres in Australia, and has an interest in 66 centres in Singapore. G8 recently announced it would buy another 63 Australian childcare centres for $105 million.

Affinity has a market capitalisation of about $129 million, and I think it's reasonable to say that the downside valuation for this company is roughly the price G8 Education would pay for it. Based on G8's most recent purchase, I'd say the downside for Affinity Education is $110 million, assuming that their childcare centres are of the same quality as the 63 G8 is planning to purchase.

G8 Education has a market capitalisation of $1.25 billion, yes, you read that correctly. G8 Education also has over $100 million in debt, but I'm going to ignore that in my analysis as a built in margin of safety. Affinity Education doesn't really have debt, but it has a lease liability of over $4 million. To be extra harsh, I'm going to add the lease liability, plus the market cap of Affinity, plus $15 million just because, and pretend that Affinity Education is being valued by the market at $150 million.

So we have a childcare centre operator with 66 centres (ignoring the managed ones) trading at $150 million, and a childcare centre operator with 362 centres (including the managed ones and the ones they are about to purchase, just to be extra nice) trading at $1.25 billion. But let's adjust that again, on the basis that G8 is 25% overvalued, and say that is actually worth a round $1 billion.

So based on my hypotheticals the price per childcare centre for each company looks like this:

Affinity Education: $2.3 million per childcare centre

G8 Education: $2.7 million per childcare centre

Now I'm the first to admit there could be some problems with this analysis. For example perhaps the management at G8 is superior to Affinity Education. Undoubtedly, the larger size of G8 Education makes cost efficiencies easier to generate. Perhaps, staff can be retained more easily, and maybe their businesses in Singapore are just that much better than the Australian ones. Potentially the exposure to foreign currency is a plus.

Maybe Affinity Education has bought the worst Childcare Centres on the market, or their centres are simply not as impressive as G8's. Because of a relatively short history as a company, we just don't know when it comes to Affinity Education.

However, I’m happy to hitch my wagon to the master of operations at Affinity Education, Gabriel Giufre. Ms Giufre has 14 years of experience working in childcare, is a major shareholder, and build up Eternal Echoes Pty Ltd, a company that sold its management rights to Affinity. She will be assisted by Ms Fiona Alston, who seems like the kind of person who will make sure that the childcare centres nurture their young charges. If these women deliver, I think Affinity Education will be rerated.

There's always a risk with investing in newly listed companies, and I would far prefer it if Ms Guifre was the CEO, although perhaps it is good that she focuses on operations without the burden of capital allocation. Justin Laboo, the CEO, has experience managing a portfolio of retirement villages, of all things, so here's hoping the maxims about second childhood translate to business experience. Happily, he has children, so should be alert to the needs of the children under the care of Affinity. Overall, I'm willing to invest, based on a risk reward analysis, and I bought shares a few weeks ago at about $1.40 per share.

I'm adding Affinity Education to the Hypothetical Ethical Share Portfolio today, at a price of $1.45. I consider it the riskiest addition to the portfolio, to date. The biggest risk is that the company does not meet prospectus, in which case I may actually sell the shares (depending on the size of the miss). If this is the case, I will also sell Affinity from the Hypothetical Ethical Share Portfolio and record the loss on the portfolio scoresheet, accordingly.

Update: Quite recently, I've had a reader raise concerns about the whether this company deserves to be in the hypothetical ethical share portfolio. He contends it does not. In the meantime, I am selling Affinity Education from the Hypothetical Ethical Share Portfolio, at today's closing price of $1.50 - a blemish, that's for sure. Update will be forthcoming.

The Author owns shares in Affinity Education. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

Sign up to the Free Newsletter to get access to the hidden research on winning companies such as Global Health and Fiducian Portfolio Services.

Follow @claudedwalker