Care homes provider Southern Cross Healthcare's has reverberated across a sector already under pressure. Other healthcare companies, including Care UK, Assura, Mears, CareTech and Ashley House have all seen their share prices fall well in excess of the 4 per cent decline in the FTSE All-Share Index since late June.
But Paul Humphries, finance director of Care UK, which has seen its shares fall 21 per cent since late June, says that the woes of competitor Southern Cross have little bearing on the sector as a whole. "What Southern Cross said has no relevance [to us]. It's entirely specific to Southern Cross's problems," he says. "What they were putting across as market-related issues, were not market-related."
Mr Humphries is adamant that central government funding continues to flow and that Care UK hasn't experienced the delayed bill payment by local authorities that Southern Cross partly blamed for its troubles. Quite the opposite, in fact. "Some authorities are paying us in advance," he says, also refuting Southern Cross's suggestion that occupancy levels are falling across the industry. "They are where we expected them to be," he points out.
Investors do not seem to share his confidence, though, and their concerns run deeper than the possibility of margin pressure brought about by decline in local government spending and rising vacancies. Worries that providers are over-indebted at a time when property valuations are plummeting is the main reason the shares have suffered.
"It's a classic double whammy - the worst of both worlds," says Morgan Stanley analyst Martin Whitbread. "There are margin pressures in existing businesses, as well as concerns over future growth because of the difficulty in accessing real estate."
Care home providers have consistently underpinned earnings growth by using debt markets to underwrite a strategy of frenetic acquisitions, a tactic that Investors Chronicle has previously warned could come back to haunt them (see ). Now it seems that the nightmare of breached debt covenants (Southern Cross is now in the process of renegotiating its debt) and the consequent inability to fund further acquisitive growth have become a painful reality.
But certain market attractions remain undiminished, namely the constant high demand for care services for the elderly, which some see as largely independent of the economic environment. "Our view is that demand from private payers is more resilient than the market would imagine. There is a level of dependency because accessing care services is not optional," says Mr Whitbread. Individuals with more than £22,250 of assets are liable to pay the majority of the bill for home care, and high house prices mean many will remain well above the means-tested threshold.
The end result is that, as cautious investors flee healthcare shares, opportunities are arising for those prepared to stomach extra risk. Because there are so few companies in a sector dominated by one or two larger players, smaller companies - less scrutinised by analysts - tend to suffer. This is despite very different exposures to the property market, to local government authorities and to wage inflation - a nervous market, it seems, would rather throw the proverbial baby out with the bathwater.
, for example, is more of a property company than most of the others. It owns general practice surgeries and has a pharmacies business. It's also trying to establish itself as a polyclinic operator, but this business is in its infancy. , however, already has a significant order book of work building these 'super-surgeries'.
is the most diversified operator owning both care home operations and clinical care businesses - in stark contrast to Southern Cross, which is solely focused on the operation of care home facilities. sells to yet another different niche, offering residential care services for adults with learning disabilities, while is more of a services group, providing mechanical and building maintenance support for local authorities, which include healthcare providers.
It remains to be seen whether Mr Humphries is right, or whether the issues highlighted by Southern Cross spread to these other providers - which would mean the sector continues to underperform. While investment opportunities are clearly emerging for the canny, it seems the sector has, for the time being at least, lost its defensive appeal.
