Public healthcare spending cuts and rising staff wages have plagued companies operating in the care home sector and listed group Cambian (CMBN) has found itself at the heart of the troubles. In years gone by the group grew rapidly through overambitious debt-funded acquisitions. When in 2015 the group struggled to open new care homes, admissions and revenue growth slowed. This exposed a poorly controlled cost base which pushed profits down, turned cash flow negative and caused a breach of banking covenants. While Cambian was able to renegotiate its borrowings, albeit at some considerable expense, it has been left over-indebted and in desperate need to sell assets. However, it's valuation does little to reflect these dire straits.
- Private equity interest in care homes
- Growing children's services business
- Net debt too high
- High valuation
- Vulnerable to NHS funding cuts
- Selling off more valuable business division
At the end of June, Cambian's net debt stood at an ungainly £253m, equivalent to six times cash profit. Amendments to its £290m debt facilities in May cost an initial fee of £2.9m. This, coupled with two months paying steeply higher interest charges, led to a 74 per cent hike in interim finance costs to £7.3m. Furthermore, the group is under obligation to pay back £120m by the end of April next year or incur a £4m fee.
In order to alleviate the debt burden, management has decided to look at selling its adult services division and focus on growing its children's care service, which has been performing well. The market seems to like this idea, and the group's share price has been rising steadily since the announcement was made.
Part of the excitement might be because care homes currently seem to be in demand from US private equity firms. US group Acadia is in the process of selling 19 of its care homes that formed part of its acquisition of The Priory in order to satisfy the demands of the Competition Markets Authority. The Priory itself was bought at an enterprise value (market cap plus net debt) of 11.3 times cash profit and it is rumoured the three US private equity firms lined up to bid for the 19 hospitals may pay between 8.3 times to 10 times cash profit.
While a sale of Cambian's adult services division would be a big plus for the balance sheet, we think the market may be over-egging the potential upside given the company's enterprise value (EV) currently already equates to 11 times last year's cash profit and 10 times Numis's forecasts for 2016 - not very far off recent take-out multiples. The valuation is also high in comparison with rival Caretech, which has an EV of less than 10 times its 2015 calendar-year cash profit and 8.7 times broker Panmure forecasts for the 2016 calendar year.
What's more, losing the adult services division could put Cambian's valuation under pressure as this business is more mature than the children's division. That means, while its revenue is lower than the children's division at 40 per cent of the group total, it generates higher occupancy rates, higher margins and therefore higher cash profit (58 per cent of the total). Even if Cambian's strategic initiatives do offer relief, it is operating in an incredibly tough market. As pressure piles on the NHS, further spending cuts to non-critical care are looking increasingly likely.
CAMBIAN (CMBN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 119p | MARKET VALUE: | £219m | |
| TOUCH: | 118-119p | 12-MONTH HIGH: | 290p | 49p |
| DIVIDEND YIELD: | nil | PE RATIO: | 27 | |
| NET ASSET VALUE: | 131p* | NET DEBT: | 105% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 214 | 12.9 | - | nil |
| 2014 | 241 | 24.2 | 10.8 | 1.8 |
| 2015 | 290 | 18.6 | 11.3 | nil |
| 2016** | 326 | 7.6 | 2.5 | nil |
| 2017** | 339 | 7.1 | 3.3 | nil |
| % change | +4 | -7 | +32 | - |
Normal market size: 3,000 Market makers: 6 Beta: 0.24 *Includes intangible assets of £184m, or 100p a share **Numis forecasts, adjusted PTP and EPS figures | ||||
