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Southern Cross Healthcare became another high profile victim of the credit crunch when its share price plummeted as much as 85 per cent after it was forced to issue a profit warning and its finance director, Jason Lock, departed abruptly.
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The country’s largest operator of care homes, which was capitalised at close to £1bn nine months ago, now has a market cap of less than £200m. Other companies in the sector such as Care UK, Claimar Care and CareTech have also been hit due to rising concerns about funding in the healthcare services sector.
Southern Cross downgraded its earnings forecasts to around £80m due to adverse occupancy performance in the past three months. This is 13 per cent below Brewin Dolphin’s estimate of £91.7m, which is now under review. The company also blamed delays in the release of funds by central government to local government authorities for deteriorating market conditions. The group’s specialist healthcare business has also continued to perform poorly.
But potentially more troubling to investors is the company’s struggle to sell some of its freehold properties, this was meant to have been completed by today to help repay loans due. Southern Cross' banking syndicate has granted an extension of four weeks to the repayment date during which time it has to sell the properties and repay the loan or risk breaching its banking covenants. In a further blow to investors’ confidence, the company announced that its current finance director, Jason Lock, is leaving “with immediate effect”, to be replaced by Richard Midmer. Mr Midmer previously worked beside chief executive Bill Colvin at NHP.
We are currently seeking assurances from management that its efforts to sell freehold properties will be successful in the next few weeks to fund the repayment of the short-term loan.
One broker estimates that EPS for the year to 30 September will be about 21p. At one stage the shares fell as low as 47p, implying a current year PE ratio of about 2.2 times – crazy stuff. The shares have bounced back to trade at 105p. Even after the bounce, the company looks to be in some trouble. We have downgraded our recommendation to fairly priced, pending discussions with management.
Last IC View: Buy, 397p, 12 May 2008
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
