Caretech's (CTH) directors have been piling into the social and residential care company's shares of late, with its founders forking out £1.4m last month (noted in our director's dealings). With property values forecast to rise substantially, an earnings-boosting acquisition recently completed, diversifying revenues streams and very reasonably priced shares, we think others should follow suit.
- Revenues diversified
- Wholly-owned property portfolio
- Directors have been buying
- Decent dividend growth
- Plenty of debt
- Slow pace of refurbishments
The memory of the spectacular demise of Care UK and Southern Cross may have caused many investors to give a wide berth to what should really be a steady and reliable sector. Fortunately, it's the more attractive attributes of the care industry that Caretech exemplifies. For one thing, as its recent half-year results showed, Caretech is now a far more diversified business than its competitors. Diversification was a deliberate move on management's part after it became clear that fee pressure would hit the whole sector as public spending was squeezed.
The response was to move into services such as foster care, which generated 13 per cent of revenues so far this year and allowed the company to circumvent the largely flat fees it earns to look after young adults with learning difficulties. This also gives it a degree of flexibility over its costs that solely residential care companies lack, which showed in a 50 basis point improvement in its first-half cash-profit margin to 20.9 per cent.
In any case, the core business looks healthy with occupancy rates typically over 90 per cent and new capacity coming on stream as properties are refurbished - this has an immediate impact on profits due to Caretech's natural operational gearing.
CARETECH | ||||
|---|---|---|---|---|
| ORD PRICE: | 219p | MARKET VALUE: | £114m | |
| TOUCH: | 218-220p | 12M HIGH: | 219p | LOW: 144p |
| FORWARD DIVIDEND YIELD: | 3.3% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 148p | NET DEBT: | 173% | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 89.7 | 15.8 | 26.3 | 5.20 |
| 2011 | 109 | 12.5 | 18.5 | 6.00 |
| 2012 | 114 | 12.4 | 18.0 | 6.50 |
| 2013* | 120 | 14.2 | 21.1 | 6.60 |
| 2014* | 125 | 15.1 | 22.4 | 7.20 |
| % change | +4 | +6 | +6 | +9 |
Normal market size: 1,500 Matched bargain trading Beta: 1.00 *Panmure Gordon forecasts, underlying PBT and EPS figures | ||||
The other key to the company's success is the fact that, unlike at Southern Cross, Caretech resisted the temptation to play the sale-and-leaseback game when credit was plentiful and cheap. So while Caretech carries high debt levels for the sector, it actually owns the properties it runs and is not stuck between 'upwards-only' rent reviews and flat, or declining, fee income.
Property purchases also make commercial sense. For example, the recent £38m acquisitions of two freehold property portfolios will result in an interest bill of £1.6m compared with the £4.4m it was previously paying in rent. Caretech's properties are currently held on its books at £179m and were last valued in April 2012 at £225m. This could go as high at £280m at the next portfolio review, according to broker Panmure Gordon forecasts.
Debt should begin to stabilise from this year onwards as renovation projects tail off and Panmure Gordon forecasts that net debt will fall from £133m now to £127m by 2015. And with cash from operations of £21m forecasts this year and next, it looks as though Caretech can comfortably meet its obligations. Admittedly, there is the possibility that fees will continue to fall in real terms, but so far the company has offset the worst of the squeeze.
