Since then, CareTech has negotiated an additional £30m credit line on top of its existing bank debt facilities to augment the £29m of net cash raised through the non-dilutive ground rent fundraising, details of which I discussed at the time ('Asset-backed, lowly-rated property play', 23 Feb 2016). It hasn't wasted any time deploying the fresh capital, having used £18m of the funds to acquire Oakleaf Care, a Northampton-based specialist in the care and rehabilitation of men with brain injury. Oakleaf owns nine freehold sites with 102 residential beds. The deal was announced just before the March half-year end and will be immediately earnings enhancing.
The other main feature in the results was CareTech's robust cash generation, something that's important when a company is carrying net borrowings of £156m on its balance sheet, a debt level equivalent to 111 per cent of shareholders' funds. Underlying operating cash inflow of £15.6m represented 92 per cent of cash profit, highlighting the cash-generative nature of the business and high and stable occupancy rates of around 93 per cent in its mature care homes. Fee rate negotiations with local authorities are ongoing, and reassuringly I understand that "the final outcome remains more positive than in recent years".
I also note that as part of February's non-dilutive ground rent fundraising, CareTech's entire property portfolio was independently valued at £282m after the £29m disposal, implying it has increased significantly in value since the September 2015 year-end when it was valued at £294m compared with a carrying value in the accounts of £256m. This means that there is significant hidden value in the balance sheet as property is only in the accounts at £263m at the end of March 2016, and that's after factoring in the nine freeholds acquired in the Oakley transaction in March. By my reckoning, there is a hidden valuation surplus of at least £46m, a sum worth 74p a share. This means that once you mark property to market value then shareholders' funds are nearer £187m, or 300p a share. It also means that the portfolio has a far more comfortable see through loan-to-value ratio of closer to 50 per cent.
The final point I would note is that the company has identified a pipeline of acquisition opportunities to deploy its capital on over the next 12 months, so there are decent prospects of further analyst upgrades. For example, John Cummins at broker WH Ireland believes that if the aforementioned £60m is deployed in full, then the company has the potential to deliver cash profit approaching £50m in the 2018 financial year. But even before taking future deals into account, the rating is hardly punchy. That's because based on cash profit rising from £32.5m to £37.2m in the 12 months to the end of September 2016, expect pre-tax profit to rise by 17 per cent to £25.8m to deliver EPS of 33.1p and a dividend of 8.7p a share.
On that basis, CareTech's shares are rated on seven times likely full-year earnings and offer a 3.7 per cent prospective dividend yield. Add to that a 20 per cent-plus discount to book value once you mark freehold properties to their open market value, and there is undoubtedly value here. So, having commenced coverage when CareTech's shares were priced at 230p ('Time to take care', 16 Mar 2015), I continue to rate them a decent buy at 237p and have a target price of 300p.
