Mailbag: incl. Is it time to invest in childcare? November 12, 2023

0:10Welcome to Motley Fool Money, our very special Sunday Mailbag edition. I'm Scott Phillips He The man of the ocean swim The man of the Hawaiian Ironman triathlon The man who just Could not Get enough exercise Before doing this podcast On a Sunday morning Is Andrew Ram Page How are you buddy? I'm very good sir I'm very good Yep Done the routine Feeling good about myself Yep It's all about the Bodies are temple mate Bodies are temple You know it Hey I reckon we should get straight We had a good chat on Friday We had a lot of questions To get through Should we just Straight on in Yep Yep, let's do it.

0:45Here's one from Michael who says, Hey, Mr. Phillips and Rampage. Question for the mailbag. I just listened to Andrew's quick napkin company analysis with EPS, multiplying growth and PE, etc. The question, how does equity and the strength of the balance sheet play out in this? The best example is surely Harvey Norman and JB Hi-Fi. Love your thoughts, Michael. Yeah. I think it's a really, really good question, mate. So for those who don't know, and Myra DJ's for another example, Harvey Norman and JB Hi-Fi have roughly the same PE, give or take. I don't know what the numbers are. They're both single digits or very, very low double digits.

1:28JB Hi-Fi, not a huge amount in the way of assets. Harvey Norman, $4 billion of their$4.5 billion market cap is in property, assets on the balance sheet. If you look at this business, say, well, they're both roughly the same valuation-wise. And that's absolutely true if you look at earnings multiple. On the other hand, the balance sheet, very, very, very different. What do you look at when you consider those sorts of questions, Matt? There's like in life and in so many things, there are always trade-offs. So you would say, I haven't done the work, but my strong assumption would be that when you add up all the money that was raised and invested into Harvey Norman since day dot, and then you look at all the return that that has generated and you do the same with JB Hi-Fi, I suspect JB Hi-Fi has gotten a much better internal rate of return, they call it, in the sense that the – I've got to be careful of the phrases I use.

2:25We touched this on Friday. I was tempted to sort of say Harvey Norman has a lazier balance sheet. And that just means that they've got all this money tied up in property, which in and of itself is not generating a zero return. It's probably been a reasonable return, in fact, but not great and not the kind of return that JB Hi-Fi is getting just by operating its business. So on that measure, JB Hi-Fi is a superior economic engine. It took less in and spat out more. That's a win. Yep. But as I said, there's a compromise here. And we touched on this on Friday. The compromise is that Harvey Norman is far more resilient.

3:04Like things could go really bad. They could suffer losses for years and years and years and years and still be standing because they'd probably just sell and lease back their properties. There's all kinds of options that a JB Hi-Fi doesn't have, where if they got into sustained unprofitability, well, they're in real trouble. They ought to raise a bunch of debt or equity or something, or they don't exist anymore. So that's the trade-off. In terms of my little back of the napkin valuation model, it doesn't factor into it at all because it's just sort of saying the share price in a point in time and the return between then and now is just purely a function of whatever the earnings per share are and what the PE is.

3:43Now, how you get to that earnings per share is there's a hundred different ways you could get there and some will be far riskier than others. So it won't fold into the equation and process directly, but it should and this is why the question was so great it should factor into your reasoning in the sense that if something is um very fragile i would be wanting a bigger margin of safety for fun if you want to call it that i was writing something up a couple weeks ago i went and had a look at babcock and brown's um all right investor presentation yeah the the most recent one before it all went belly out.

4:25For those that don't remember, Babcock and Brown was like touted as a mini Macquarie Bank. They were an investment bank that had a long history before being listed on the ASX. And they just made it rain. Like they just made money hand over fist. It was Wolf of Wall Street on steroids. It was just insanely profitable. And you could have very easily done my method where you've gone, well, look, they've grown at very strong double digit rates forever. I feel as though they can grow at five or 6 % per annum for the next five years and shouldn't be a stretch to assume the market will be trading at a P of 15, 16 at that point in time.

4:57And, you know, bingo, bango, there's my valuation. Of course, the real valuation was zero because it went out of business because the GFC happened and all their assets got wiped out and they were leveraged up to the eyeballs. And that's when it was like, so actually the balance sheet doesn't make a difference until it makes a difference. And I hope I've squared the circle though. That's how I would sort of think about it. Definitely, I think it's a useful calculation, but it's only useful in the sense that you have the assumption, presumption maybe, that the business will survive and not have to go through some hyper dilutive sort of capital raise to stay standing.

5:37It's a good point. I think that's – so Myron DJ has had a similar thing. For a while, they were a similar PE. DJ has had a truckload of buildings. so their cbd kind of stores in sydney and melbourne maybe brisbane i think it was just near melbourne and my had nothing and the same p and you go hang on how is that possible i think it's i mean it is it is a piece of string question it's a philosophical question at some point michael because to ram's point which one of those businesses would you want to own uh and if you own them you know how lazy is that balance sheet you know there's there's there would be in some cases a very real argument to say actually harvey norman should sell or spin off some of that property because it's not being valued by the market for that i mean relatively speaking this is not something we've just both uncovered actually there's four billion dollars worth of property here hey we should go and grab it now by the way i should say at this point i own harvey norman shares as our business well no but just to repeat it and for anyone who doesn't know that um so you know on one on one level you've got this business that is as you said ram you know far less productive and has all these assets so you know when do you get value for them and if you never get value for them then it is just that fail safe rainy day protection and i've i said on friday i like that um not about harvey norman on friday but just in general i like the i like the a lazier more conservative balance sheet but how much is too much and how much is too little maybe jb high five's balance sheet is plenty lazy enough um maybe harvey norman is is actually hurting returns by keeping that much in assets on the books because it's money that could otherwise be returned to shareholders in one way or another and you know if jerry decided tomorrow i'm going to sell my entire property portfolio and lease all these things back from the new buyers and i'm going to give our shelves back four billion dollars that's a pretty bloody good return now should he no probably not but equally i'm not sure jb high five has done a terrible job by having no meaningful assets in fact harvey norm is trading at 1.03 times its book value so basically you're you're buying Harvey for its assets and getting the operating business for free.

7:42On the other hand, JB Hi-Fi, three and a half times book value. So in the good times, JB Hi-Fi is a much, much, much more efficient, effective business with a much better return on assets. That's what you want. You want a high return on assets in general. Harvey Norman, much, much lower because it's got much more assets. Now, if you are worried about downside protection, primarily or only or significantly, Harvey Norman is a better idea.

8:08if you're not worried about it or you think the growth is likely to come in from Jerry Harvey and then do that. It does give you a... Sorry, look, I'm not advocating for this, but it's only because you need someone like a Jerry Harvey at the helm. You need a... What's the word? A personality that's there because let's say private equity took over Harvey Norman tomorrow. Yes. Shareholders would make out like bandits. Oh, yeah. They would just sell the property down, big special dividend. Or we're going to do it. It's just sort of like - That's exactly what happened to David G. That's - I mean - Or my son, yeah, yeah, yeah.

8:41Yeah, yeah. And the reason it doesn't is because Jerry Harvey doesn't want it to, and he's not driven by maximizing profits. For whatever reason, I'd like to think it's for prudent longevity considerations. Sorry to interrupt there, but that's - Again, there's a compromise that is deliberately, I would imagine, being taken there. 100%. I want to, though, address Michael's question because there is another consideration here. Harvey, well, there's a couple. Firstly, they're not identical businesses because Harvey is a franchisor predominantly, particularly for its Australian business. So it's not the same.

9:13It owns the brand, it owns the properties. Someone else runs the businesses. The business models, for every dollar of extra revenue that both businesses get, Harvey normally gets much less of it than JB Hi-Fi does because JB Hi-Fi owns every dollar of revenue. Harvey gets its cut of the franchisee's revenue growth. So growth and decline in those businesses have very, very different outcomes. And so the asset model should be different. The other one, and this is the bigger one, by the way, is because Harvey Norman owns its own properties, it's not paying the rent it otherwise might be that JB Hi-Fi has to pay.

9:52So at a PE base, if you were to equalize these two companies for their balance sheets, which you could, you'd have to also equalize the P &L for the same thing. In other words, if Harvey Norman didn't have that asset but had to pay a lease for those assets, it would have less money in profit. So the PE would actually change if you actually right-sized or standardised the balance sheet. So Harvey Norman would effectively make less money because it'd have to pay more in leases, but it doesn't at the moment because it owns the assets. Equally, JB Hi-Fi, if it owned the assets, would make more money because it would save money on those lease outgoings.

10:28and so you just got to be you got to allow for both of those things at the same time if you want to make an adjustment or comparison to the balance sheet you need to adjust similarly in your estimation or your analysis for the different outgoings that owning a place versus paying a rent and think about it as a homeowner uh if you own your own home you have a an asset that call it a million dollars and no outgoings yeah you could sell that asset you could get a million dollars but you'd have to pay a rent every week the renter has a higher return on assets because they are not paying for those you know they don't have the assets on the balance sheet but they have a lower um profit you know more outgoings for every dollar of income so you have to adjust both at the same time if you want to do a like for like overall um i think having one's cheaper on a pe basis anyway uh and i like the backing of the assets so i think it's a safer option uh i expect that jb heifer will probably have a brighter future profit wise um but you're paying us you're paying a certain p for that so i like them both i think i've recommended them both so there you go um i own harvey norman yeah yeah i can't add to that it's just always a matter of trade-offs so it's such in not just in this example but in in almost every aspect of it We talk a lot about opportunity costs when you're building a portfolio.

11:50As soon as I put my money here, it can't be anywhere else, you know? And it's, yeah. And our conversation on Friday for those that didn't listen to it was just really hammering that point is that sometimes it's better to not be super efficient. I mean, it's not important until it is. And it's a personal, there's no right or wrong answer, but I'm with you, mate. I would rather there be get rid of you just in time delivery, you know, have some inventory there. I think that's a good idea to have some inventory there. Have some money tucked away earning bugger all interest. Fine. You know, it's the drag.

12:24I get it. In case I need it, you know. It's worth nothing to do until it's worth everything to you. Exactly. Let's not hire every, like expand the workforce by 3 ,000 because we expect these orders to come through next month. Or, you know, let's just be a little bit conservative on things. And we will be seen as not being as efficient as we could otherwise be. but when the tide goes out we'll still be standing you know or we'll still we'll be the ones with us with our trunks on and others will be revealed to be naked it's honestly it's exactly what you want because it means you're not going to go broke and that that opportunity is is huge um yeah i think we've probably done that one yep uh one from matt who says g'day scott i have a question for both you and ram for the pod machine see then i was the pod machine i keep telling you i was hoping for both of your general thoughts on the following.

13:12I'm in my mid-30s and have a salary sacrificed for a few years now to maximum contributions in super. I'm happy doing this with any pay increases I received. They went straight into super, so I've never seen any difference. Super smart. My dilemma though, says Matt, is I have been thinking more so recently that by contributing those extra funds to my super, it doesn't allow me to invest as much as I could on my personal account what would your opinions be if i stopped my salary sacrifice and automated those funds into investing in my personal account which i can access if the need ever arose i understand the tax benefits i am receiving with the salary sacrifice but it's something i've been thinking about more recently and would hate for retirement goalposts to be moved further away when the time comes to retire thanks for the time you both share to help us all out cheers matt yeah really really good question um what are your thoughts around how have those thoughts changed with the with the recent changes to to superannuation rules from the government yeah yeah i mean i i come from a uh i recognize a whole different song sorry well i go from a cynical place i mean you all else being equal there's it's so hard to compete against the super option because of all the tax advantages and you know it's just it's so demonstrably better and any financial planner listening they go we'll do it in super dude it's clear look look here's the mass where i and i haven't done that and i haven't maximized i mean obviously i put money into super and more than i have to in fact but i have they've i have a view that the goalpost will be moved we were talking on friday about the structural deficit situation we're in increasing there is a honeypot there that government will they've already tapped into it they've already tapped in remember in the gfc oh um um oh you can buy a house with it now yeah but you know it's just it it when when there is a the next crisis comes along and and we aren't financially prepared for it we're not um they will dip into it or they'll push the retirement age back to you know the the what's it called where you can access it um reservation age thank you um they'll push that back further or something and and the other is more macabre observation is that maybe you get hit by a bus tomorrow so i i'm i'm a i'm a hyper long-term focused person in general um and i think you you they're advantages to being that way but at the same time i i mean i could i could go out into the middle of australia in the cheapest caravan park i could find raise the family there on two-minute noodles and build the most incredible fortune that the world has ever seen.

15:49But I'd be a – you know, I think there is a – and there's no – it's a subjective consideration, but there is something to be said of enjoying the here and now. Yeah. You know, the other end of the spectrum is I only enjoy the here and now. I don't do anything for my future. And that's wrong as well. So where that line lies is up to you. Me personally, I don't because I think the rules will be changed and because I don't know. I'd like to have some – I'd like to enjoy the fruits of my labors before I'm 85 or whenever I'm allowed to touch it. I want to buy a house at some point. That for me is the big thing.

16:31And if it's locked up in super, well, the way it's currently structured, I can't. Yes, that's currently structured. And it's why it's a personal, like it depends kind of thing. But that is to the point before about compromises, that's it. That's what you have to sort of, are you hyper confident that you will live a long and healthy life and that the goalposts won't be moved too much and you feel as though you're still enjoying life as it is today without having to be overly frugal? Put whatever you can into super. If not, adjust accordingly. I think that's right, mate. I'm a little less cynical than you, but not by all that much.

17:08so again obviously matt we can't tell you what you should do as with any question we're asked we only talk generally about the issues um i

17:18there is a great line i heard once about about a business and two managers talking and one says what if we train all our staff and they leave the other guy says what if we don't train them and they stay yes yes you know and it's and it's a nice it's a nice kind of reminder that there are two ways to think about it so uh what if i yeah i have people say we shouldn't have superannuation because too many people die before they get super like yeah but most don't and so you know i i get i get that it kind of sucks to have saved if i said 11 percent of my salary and i die the day before i retire that's gonna suck i mean my family will get some money so that'd be worthwhile and still benefit i think that's still a good decision overall uh but what if i lived at 95 and i didn't save because i thought i might die at 65 there are there are always trade-offs and i don't think it's back to that bloody it's exactly back to what we were talking before mate about being conservative right the the lazy personal balance sheet is you don't want to you don't want to be so skint that you're never spending money yeah on the other hand you don't get 85 and go well my last 10 years are going to be rubbish because i can't afford the nursing home and i can't afford the medical care and i can't afford to replace the car and so you spend your last 10 years going well i might be in the prime of my life but i'd kind of like to be more comfortable i am now and if i'd done some different things and maybe saved it might be worthwhile yeah so there's absolutely a balance there as you rightly point out for me um as with you mate the answer is both um matt i i the tax savings are extraordinary i talk about goalposts i don't share your cynicism ram in for for the average person right if if general twiggy super is is taxed at 38 at some point well well, okay, it is what it is.

18:58Is it fair or not? Probably, probably not. Different conversation, doesn't matter. I'm never going to have that much wealth. Now, do I think I'll be paying a bit more in super in tax when I retire? I hope so, because I think superannuation is grossly unfair to everybody else. There are people taking six-figure retirement incomes and paying zero tax, while other people are paying marginal rates of 30%, 35%, 38%, whatever the number is, who are working. I think that's just extraordinarily unfair, unreasonable. So I think we'll probably have some changes. do i think superannuation will still be more attractive than investing my own name yes absolutely even if they do change and this is the thing you that's a good point about probably too probably too you're a little too clever by half i think this time around yeah there is almost no chance that superannuation is worse than investing in your own name and even if it was just as bad you're still no worse off now yes you've locked the money up but you can't in the range of outcomes okay there's a zero in my mind there's a there's nothing zero there's a one percent probability super innovation is taxed more harshly there is a two-thirds probability it's taxed more uh conservative more concessionally as one-third chance it's taxed the same so roller's probabilities up and i'm still better off investing in super now maybe it gets back pushed to push back two years that also kind of sucks uh but am i still better off yes uh so so i am that being said for all that so that i strongly believe that that being said that's a good point i also invest in my own name because i want to have the flexibility to add to or to take money out of super sorry add my investing before preservation age so if i want to throw this whole thing in sign off for the podcast forever and go on you know move to ram's caravan in the outback and eat two mint noodles uh because i don't want as a lifestyle choice then i want to have the choice to do that and right now i've got the choice of either working or waiting for super and having nothing in the meantime or i can have some of that money and access to it so i think optionality is important And for me, I wouldn't avoid contributing to super for goalpost reasons.

20:54I think it's the wrong framing, honestly. I think no one wants to change. And yes, it might change. It's almost certainly going to still be better than not putting money in super concession-wise. So I would still do it. But I also want to have money outside. So I have the flexibility to spend what I want when I want, particularly before preservation age, if I make that choice. I don't want to be constrained to, gee, I'd love to give up work now. Now I've got$84 million in super. It's not going to happen. But I can't touch it yet. So now I'm forced to work for another three years, stocking shelter, we'll just finally get my hand on the honeypot.

21:27There's something in between there, which is I want to have a great superannuation. I think it's super attractive tax-wise, but I want to have some other money. So that if I want to go part-time, give up work, buy a car, whatever, between now and retirement age or preservation age, I can do that. Yep. I guess one other risk I would have is not so much in changing tax rates or eligibility criteria. And I'm not saying I expect this, by the way, but I just put it out there as a possibility. There are the risks of capital controls. In other words, we get in really bad economic situation and the government will say, well, look, you have to dedicate 40 % of your super to government bonds.

22:10Yep. We're going to point a gun at your head effectively and say, buy the bonds, take our debt. That's happened actually remarkably often in history, really often. And that's not my base case, by the way. But it is something to be aware of where you'll still sort of have the basic structure and outline of it, but you just lose flexibility in where you can invest your money. Except that could also happen in outside super as well, by the way. Yeah, that's actually 100 % true. Fun managers could be made to do the same thing. Individuals could be made to do the same thing. I imagine they go for super first because that's the easiest one for the government it's just like we're doing this and it's all good because now we all get to invest in Australia's future and you can help be a part of funding that you know for our kids what what's the interest rate I have to get okay and how much inflation am I wearing in this next 30 years that you make me it has worked out badly for a lot of people around the world throughout history and I don't think it'll happen but it could exactly no very very very possible um it's a really it's a really good question though i think a bit of both is is probably and generally the right answer yeah hey um here's a question from an anonymous uh questioner who says this got an andrew i'm an avid listener of the podcast and admire the depth of analysis you bring to various investment opportunities thank you currently i'm particularly interested in exploring the positives and negatives of investing in the small amount of asx listed child care providers.

23:36I myself am the owner of a few small for-profit childcare services and find the public's general perception of operators quite off the mark. There is a narrative that large corporate childcare providers are huge profiteering juggernauts. However, a quick glance at the share price of the few companies that are listed suggests anything but. With COVID proving difficult for much of the sector, we then rolled straight into a staffing crisis that seems to have no end in sight, which is affecting many businesses' ability to operate at capacity. I've heard Andrew briefly refer to the sector in previous podcasts so i assume he has done some research into investment opportunities at one point with a fourth child care provider current a recent listing the asx i'd love to hear both your thoughts on current and future factors that may affect those businesses and whether the sector appeals to you or not as an investor and that's from an anonymous questioner oh i love that um yeah yeah it's something's different I think when you're a small, I say small only in context of relative to ASX listed companies, you know, but if you are in a few different childcare centers, I suspect, and this is like the hyper-rational thing would be just like, I want to make sure that these things are throwing off enough cash to justify the investments and to make it worth my while.

24:52Right. Like that's job done. If I hadn't, if I had a child, if I could buy, well, let me start again. You ring me up tomorrow and say, mate, I've got an opportunity to buy a childcare center. Here are the financials. We can buy it for four times earnings. So we'll pay it back in four years. And then after that, we just got a guaranteed income stream. Now, I'll be honest with you. I don't see it growing too much. We're at capacity. So we'd have to open up multiple centers. But the plan is we'll get the odd fee increase every now and again through inflation and the rest of it. I'm sure we'll have some good times and some bad times.

25:25But it'll throw off a reasonable amount of income. Are you in? and my answer would probably be hell yeah you know yep p4 absolute cash flow is guaranteed we're not guaranteed sorry i've got to be careful with my language likely cash flows to be had over a very long period of time and then i can sell the business at some point in the future and realize the capital value hell yeah it makes a huge amount of sense the corporate model and we saw this with abc learning and i'm sure the listeners rolling their eyes because it's an unfair comparison but But I did reveal some characteristics that are at play here.

25:58Those corporate entities do not have that, if I can just get a recent cash flow, I'll be happy. No, no, no. They grow, grow, grow, grow, and become the biggest and best. And the trouble is with a childcare center is that once you hit capacity, you're at capacity. I mean, how do you grow beyond that? Well, fee increases, sure. But there are mandates and there are other things there and there's competition. So you just can't raise with abandon. So what do they do? They roll up. They go and they buy other childcare centers. And the trouble with the roll-up strategy in this instance is that there's not a lot of economies of scale.

26:32My other center has a separate rent. It's got separate staff. Yeah, I can consolidate some admin functions. And yeah, maybe I get better purchasing power for my nappy order and whatever. But not really. And so what they do is they demonstrate phenomenal growth. G8 was the same. ABC was definitely this. Were they trading on the market at a growth multiple, maybe 20 times earnings, but they're buying these private businesses for four times operating profit, something like that. So it was what they call a PE arbitrage, you know, and I can raise money really cheaply here at the market at this really high multiple.

27:17I can add that new center onto mine. I demonstrate growth, which maintains my multiple. And actually, as a feat of financial engineering, well, it's not really financial engineering, but, you know, I get incredible growth and actual real per share growth if I do the numbers right. The tricky part is with it is that you eventually run out of good opportunities. All the low-hanging fruit is taken. So every marginal acquisition is a worse and worse and worse child care center. Then the growth starts to store and then you lose your growth premium, which means you lose the PE arbitrage opportunity on it.

27:55And they're just, for me, it's not, by the way, this is the exact same thing if you look at the listed aged care facilities. Same dynamics, some unique characteristics, obviously, but same kind of thing. They're not the roll-ups I want. Give me a roll-up where I can unlock scale advantages, you know, or network effects or something like that. Not just I'm bigger, but on a per share. It's not any true genuine growth that a shareholder can likely or reasonably expect to be sustained for the long term. So when I look at them, I go, no, no thanks, as a listed company. Is a private business at the right price?

28:34100%. Sign me up. Yeah. Yeah, and I guess the other thing too is

28:43I'm not a thematic investor generally. I don't own anything based on its sector. Now, I own some things in the same sector because there are multiple attractive ideas in that sector, but I don't have a view on the sector as a whole and it is investment. You've done a great job of identifying and summarizing the circumstances they find themselves in. So I don't have a view on a sector. I say that because I want to go to both sides of my mouth for a second. And it's possible that a listed car care provider could actually run itself intelligently and conservatively and carefully along the lines you've just talked about and not get much growth, but be a really good income generator for years to come.

29:17It'd be a kind of stock that trades at 12 on a PE, but maybe gives you with franking credits a good 7%, 8%. I'm wrong with that. And that business would be perfectly fine. Actually, you get some inflation, you get some growth. More a supermarket, right? This kind of saturated business that just chooses to grow with GDP plus a little bit opens a center every now and again when it can find it. There's an opportunity. Yep. Keep it full. But otherwise, kind of it is what it is. Yep. I love your example, mate, of the aged care companies, actually, because, and I'm sure Alyssa knows this because they're in the business.

29:46This is a capacity business. If you can keep these things 100 % capacity, you make a squillion dollars. At 80 % capacity, you're losing money. Yep. And so it only is a question of, can I keep them full? It's such a great point, right? 80 % is just, I need to be 80 % full just to break even. I'm making the number up, but I believe it's around that figure. I think it might be more. It might be 85%. Either way, yeah, and that's - And then everything after that, like the profit on the margin, it's like the next kid that comes in is all profit. Yep, 100 % free. Because you don't need, you need a couple of extra sultanas and whatever, but you don't need another teacher.

30:19You don't need another set of chairs and tables. You don't need another centre. You don't need another sandpit. The costs have already been covered. This is a relatively high fixed cost investment. And those costs that aren't fixed are effectively fixed. For example, the number of educators and carers you need for that centre is largely a you know you add per child added of course but at some point you know it's it's effectively a fixed cost unless your capacity falls so far yep so so in all intents and purposes if you want to try and run it properly they're fixed costs uh but the incremental kid is is really profitable same as airlines yeah right 80 capacity they lose a fortune 100 capacity quantus makes two and a half billion dollars that's exactly how it happens virgin made some money this time around first time in a decade again why because it's at capacity with no price competition now my biggest concern with child care and i listen frankly the questioner is actually closer than i am so i'm going to make some general comments but not assume i know better the the challenge it doesn't cost much or take much to add capacity in this sector so you've got a situation where you've got relatively low margins for most players until you're at capacity but to get the capacity you have to get it you have to fill up and stay full and hope no one opens near you and sucks the kids out into a different place.

31:33Now, when you're at capacity, you can charge whatever you want. People desperately need to get their kids in. There are no other centres anywhere else nearby. So they're going to pay whatever you charge. At some point, someone says, I'll open another one nearby and another one nearby and another one nearby. One of my favourite self-written quotes about investing, give myself a wrap, is you're only as profitable as your least rational competitor allows you to be. I love it. Right? if virgin doubled its capacity tomorrow corners how am i going with the phone um if i if i um if virgin doubles capacity tomorrow kornos goes broke yeah right not goes bro it makes no money loses money yeah because its competitor is irrational now if it's purely rational like it is now so if interested in rational they all make a fortune yeah the question for any investment but particularly i'll say businesses like child care centers is how confident are you you can keep capacity high for an extended period of time without competition eroding that that business model that that margin now i don't know the answer to that uh i would be concerned about it uh i think that unless you're playing the takeover arbitrage game that ram identified beautifully at a center by center level how sure am i i'm going to get to or keep that high capacity what happens if someone opens next door or across the road or down the street or across the suburb oops now i've got twice as many places or you know whatever extra increment uh for the same number of kids so it kind of you're kind of relying on localized competition if you think if you have a strong view that that won't happen for whatever reason and maybe staff shortages is one maybe the government rules is another then knock yourself out i would suspect with not many barriers to entry plenty of potential uh educators who might want to leave your business and try to start their own across the road or down the street um i wouldn't think this is a sector that lends itself to superior economic returns over time now you own your centers you said you've got a few small centers maybe you know differently maybe your result is is great and maybe you have the secret source uh certainly local local branding local reputation is really important people all want to go to the best centers so that's part of it um probably buying big ones is you kind of lose that local you know people don't necessarily want to go to the local one because it's part of a big chain they've heard wonderful things about it they largely go to a center because their sister's brother's cousin's friend has a kid there who loves it raves about it and that's exactly what it is great it's exactly what it is so at an asx level i i would rather buy or invest in uh a center run by someone a bit like you want to talk about mechanics off air around uh i'd rather i'd rather go and invest buy a share of the local mechanic people rave about everyone wants to go to and if someone opens nearby they're still going to go to the same guy because he's great yeah and there is they're not going to go there or could be a girl there is not going to go there is if they're full and can't get in that's the business you want to own if i had to if i had to buy a share in and i picked toyota for fun i drove toyota's So Toyota's national service centers, where there's a bureaucracy and paperwork and culture is a bit questionable and the guy who runs it doesn't own it.

34:44Which one would I rather do? Back to founder owners as a preference for investors, I suppose. I would rather buy a small share in high quality owner operated childcare centers than buy a share in a group where as much as people try hard, and I'm sure they do, you must by definition lose that personal touch commitment dedication quality control the larger these things get where personal service and reputation really really matters um you beat me to it it is not the kind of business you want the bean counters to be in control of yes yeah you know it is um we took our kids out when they were that age of uh a place that was just awful you know and the only reason we went there in the first place we didn't have much choice because there wasn't a lot on offer but the moment there was we were gone and i know half the families we spoke to were in fact all the families we spoke to were tending on doing the same kind of thing it strikes me as the kind of business that you do because you just you love you love um looking after young kids you know and for some people they they love that you know what what a fulfilling enriching you know wonderful kind of uh uh career that is for some kind of people i think if it's the same with the mechanic you know it's it's typically the, and I'm being gendered here, but it's typically the guy who loves cars and loves tinkering about in the, it's in so many of those kinds of areas, it's sort of, they, the ones that are super successful really deliver a great service and do things above and beyond what might be in their immediate near-term profit interests.