How Affinity Childcare plans to avoid the fate of ABC Learning by only buying established centres: ‘We create a market for entrepreneurs to exit’

Caitlin Fitzsimmons Online editor

How Affinity Childcare plans to avoid the fate of ABC Learning by only buying established centres: ‘We create a market for entrepreneurs to exit’

Published 28 February 2014 12:35, Updated 03 March 2014 10:32

Affinity Childcare did not exist a year ago but it has since bought 57 centres and a chain of 12 managed centres, floated on the Australian Securities Exchange and on Friday, it reported its first set of financial results as a public company.

Affinity Childcare reported an $8.9 million loss for the year ended December 31, 2013, based on $3.7 million in revenue. That exceeded the prospectus forecasts and is set to be much improved in 2014 because the company incurred upfront set-up and acquisition costs in 2013 but only earned revenue for a short time. The company told the ASX it is sticking by prospectus forecasts of a net profit of $8.3 million and earnings before interest, taxation, depreciation and amortisation of $12.9 million for full-year 2014.

The childcare sector is currently dominated by not-for-profit chains such as KU and SDN and small community or council-run centres. The collapse of ABC Learning, founded by former BRW rich lister Eddy Groves, several years ago put many private operators and investors off because of the difficulty in making a profit or extracting economies of scale from a chain. Goodstart, run by a consortium of charities, bought many of the former ABC centres.

But private operators are returning to the sector. G8 Education, which listed in 2007, recently expanded its Australian network, buying 63 centres for $104.7 million. Another operator, Sterling Early Education, is also looking at a floatthis year.

Affinity Childcare chief operating officer John Bairstow says the company will avoid the fate of ABC Learning by taking a disciplined approach to acquisitions, only buying established, profitable centres with more than 75 per cent occupancy. The company has a $20 million fund to acquire new centres and plans to expand quickly.

“We don’t acquire loss-making centres and try to turn them around and we won’t be buying the freeholds, which ties up a lot of capital, just the businesses themselves,” Bairstow says.

While wages and rents are a fixed cost, he argues the chain will gain from efficient rostering and group buying. Acquisitions would be around 4.1 times EBIT, which averages out at $1 million to $1.5 million per centre. Affinity also paid $1 million in shares for Eternal Echoes, which manages 12 centres, and brought founder Gabriel Giufre on board.

Australia has a shortage of childcare places in many cities, particularly in Sydney and Melbourne. The lack of places is a huge issue for entrepreneurs as it affects the ability of staff to return to work after having children. While Affinity does not intend to start new centres, Bairstow says it plays a role by creating a market for entrepreneurs to found and sell centres.

“We’re creating a market for people to exit – we know there are people who start centres, run them for two years and then sell them again,” he says.

The government is currently reviewing childcare policy and Bairstow says Affinity is making a formal submission but declined to elaborate.

THE IT PROJECT

The speed with which Affinity Childcare was founded, floated and acquired its first centres meant a few headaches in getting information technology systems in place. The company had just nine weeks from the time it knew the IPO would go ahead to the day its first pay run was due. Since the IPO in December was funding the purchase of the centres the same month, there was a tight time frame for planning and implementing the IT side.

“We had no other IT systems ready and about nine weeks to get everything in place,” says Bairstow. “We didn’t have time or a lot of capital to set up a large IT infrastructure, so that is what drove us down the cloud route.”

While BRW recently ran an article comparing MYOB, Xero, Quickbooks, Reckon and Saasu, for Affinity Childcare the answer was none of the above.

Bairstow says the business went with Presence of IT in combination with SAP, after a “beauty parade” of other candidates including options from Technology One, Microsoft and Oracle.

“We had PwC help us shortlist potential candidates and software,” Bairstow says. “When you look at where we want to get to in acquisitions and scale, their advice was to go more for the enterprise end.”

It is only using 25 per cent of SAP’s capability, providing plenty of room for growth.