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CareTech well placed for growing social care demand

Recent half-year results reveal the strong growth at the care home operator, but CareTech still looks good value
June 22, 2017

A solid set of half-year results from care home operator CareTech (CTH), released alongside the announcement of two significant acquisitions, has highlighted the attraction of shares in the care home operator. In light of the acquisitions, analysts have upgraded earnings forecasts for the next three years, meaning the shares trade on just 12 times forward earnings. An enterprise value to adjusted cash profits ratio of 11.9 times is also below the sector average. With more acquisitions in the pipeline, we think investors would do well to get on board now.

IC TIP: Buy at 437p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • High and growing demand
  • Fragmented market
  • Good cash generation and balance sheet
  • Track record
Bear points
  • Ongoing negotiations with local councils
  • Increased costs

CareTech owns and operates a portfolio of care homes that provide specialist care services for children and adults. In the first six months of the group's 2017 financial year, which ends in September, revenue rose 11 per cent to £78.8m, as acquisitions enhanced the 4.2 per cent like-for-like growth. This helped send adjusted cash profit up 8.3 per cent to £18.3m. Solid growth is something the market has become accustomed to at CareTech. Over the past 10 years, the group has reported compound annual EPS growth of 17 per cent. Adjusted cash profit margins have also improved from 20.9 per cent in 2013 to 23.2 per cent in 2017.

Despite the impressive growth of the past few years, CareTech still owns just 2 per cent of the UK care home space and so opportunities for expansion are exciting. In order to capitalise on those opportunities, the group raised £37m in March via the placing of 11m new shares at 355p and has already announced the first deployment of that capital. In the adult care division, the group acquired Selbourne Care for £17m in cash. The company - which operates across the midlands and south-west - will add 57 new beds to the group's 1,799-bed-strong adult care portfolio and is expected to be immediately earnings enhancing. The second acquisition - Beacon Reach - is likely to absorb more investment in the next few years. Eventually, though, this children's specialist care facility will provide an additional 34 beds.

 

 

CareTech has been able to grow its portfolio to meet the UK's ever expanding demand for specialist care without damaging the balance sheet. In the six months to March 2017, the group generated operating cash flows of £15.8m, representing 86 per cent of adjusted cash profits. Added to the fundraising round in March and group net debt dropped by £34m to £123m. The group has also freed up £11.6m of extra funding by deferring the repayment of two of its loans until January 2019. Although this has added a slight degree of risk, the confidence of CareTech's debt providers in allowing the group to defer on its repayments, brings reassurance. The balance sheet strength gives the group significant scope for further acquisitions. According to management, the highly fragmented marketplace offers up one new acquisition every day.

But despite the opportunities of the sector, the care home market does come with significant challenges. For example, the introduction of the national living wage has increased staff costs, which most operators argue should be covered by local councils. CareTech thinks that it should be able to negotiate a 2 per cent increase in local council spending, which will be backdated to April when the most recent wage increase came in. Management is unconcerned about the group's reliance on local council payments, which contribute more than 90 per cent of overall revenue. Although being embedded with councils helps referrals, reflected by CareTech's strong position across the whole of the care pathway and reputation for quality care puts it in a favourable position when it comes to local council or NHS referrals.

 

CARETECH (CTH)

ORD PRICE:437pMARKET VALUE:£330m
TOUCH:437-438p12-MONTH HIGH:437p230p
FORWARD DIVIDEND YIELD:2.5%FORWARD PE RATIO:12
NET ASSET VALUE:259p*NET DEBT:63%

 

 

Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201412319.731.08.0
201512422.031.98.4
201614926.138.39.3
2017**16829.334.210.1
2018**18433.636.611.0
% change+9+15+7+9

Normal market size: 750

Matched bargain trading

Beta: 0.3

*Includes intangible assets of £86m, or 114p a share

**FinnCap forecasts, PTP and EPS figures