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Why the Prospa and G8 Education share prices both collapsed recently

We examine the earnings downgrades that contributed to the recent investor sell-off of G8 Education and Prospa stock.

Prospa and G8 share prices in focus Source: Bloomberg

Market musings

Yesterday we discussed how amongst all things: the market loves an earnings upgrade.

As we wrote, it was unsurprising that Appen's share price jumped as much as 14% after the company bumped up its full-year EBITDA guidance: from a shy $85m - $90m to $96m - $99m.

Of course, if the market loves an earnings upgrade, the other near-certainty is that the market absolutely hates an earnings downgrade.

Unsurprisingly then, when fresh-faced Prospa (ASX: PGL) and G8 Education (ASX: GEM) both announced earnings downgrades in the last week – the market was not shy about beating their share prices lower.

Below, we take a look at the details of both downgrades.

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G8 share price: when assumptions fall away

In August the company remained mostly upbeat, noting the following:

'Balancing the performance of the organic centres with our caution in relation to the market environment, the forecast underlying EBIT range for CY19 is $140m - $145m.'

Had the company achieved such goals – or maybe more relevantly kept that estimate stable – it would have marked a slight increase on the company’s 2018 underlying EBIT of $136.3m. Not a big leap, but at the very least not a decline.

The above guidance however, as the company would later announce, was 'predicated upon occupancy growth of mid 1% pts and wage efficiencies.’

It looks as if G8 hasn’t quite hit those targets, with the company last week announcing that 'full-year underlying EBIT forecast is now expected to be $131-$134m for the year.’

Investors responded sharply and swiftly, with the G8 Education share price falling 24% since revealing this earnings downgrade to the market.

The G8 Education (ASX: GEM) share price currently trades at the $1.94 mark – well below its February high of $3.63 per share.

Prospa share price: earnings not so prosperous

Prospa Group Limited (ASX: PGL) listed on the ASX on June 11. The prospectus forecast 1H 2020 originations of $297.4m; revenues of $88.0m and EBITDA (pro forma) of $11.3m.

Good numbers, the market rated, as the Prospa share price ran as high as $5.090. Then, the music stopped. Or maybe more accurately: slowed.

Prospa yesterday revealed to the market that while 1H 2020 originations were actually set to come in a little higher than previously flagged: now at $298.2m; revenue and earnings both were expected to now come in significantly lower. Specifically, 1H 2020 revenue was now expected to come in at around $75.0m, while earnings (EBITDA) was expected even lower at just $4.0m.

The market punished this downgrade accordingly, bidding the stock down as much as 28.57% in the aftermath. PGL currently trades at $2.775 per share.

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