It's fair to say that investors made few distinctions between different care home business in the aftermath of Southern Cross' collapse - shares slumped across that sector. Consequently, CareTech has spent the past six months persuading investors - with some success - that its situation is fundamentally different to that of Southern Cross. Moreover, sentiment towards the group could improve further following news that management has now refinanced its relatively large debt pile, and on reasonable terms.
Altogether, the company refinanced £160m-worth of debt that was due to mature next year. The refinancing fixes the average interest rate for the new facility at 4.5 per cent. As part of the refinancing, CareTech's freehold property portfolio was independently valued at £225m. While its total net debt, reported at £132m with the last set of figures, should start falling as CareTech winds down its capital investment programme - expect more detail in the autumn. The refinancing illustrates how much better it is for care home companies to own most of the assets that they run. The company has also been trying to diversify its operations by investing in fostering and care services, which are less sensitive to austerity measures than care home fees.
Investec Securities says...
Hold. CareTech's announcement was well flagged and it's likely that a lot of this news in already in the price. While we recognise the progress being made, the valuation is about right given CareTech's track record and the comparisons with last year's performance. The higher interest rate on the new debt facilities means a downgrade in EPS forecasts for 2013 and 2014 of 5.1 per cent and 2.1 per cent, to 24.3p and 28.3p, respectively – expect 24.9p for end-September 2012. However, we don't believe that this will necessarily weigh on the shares as investors are mainly focused on the ratio of enterprise value to cash profits - which currently stands at 8.5 for 2012, and cash profits are not forecast to fall. The current price target is 147p.
N+1 Brewin says...
Buy. The refinancing was good news for several of the company's key bank covenants and the headroom on the key covenant of net debt to cash profits has improved by around 15 per cent for 2013 – or 5.75 times cash profits, versus five times currently. We feel that investor focus will now shift to CareTech's growth prospects and, to this end, the recent half-year figures provided strong evidence of a stable trading and fee rate environment. We also feel that a forward PE ratio of 5.4 times, a dividend yield of 4.8 per cent, and a free cashflow yield of under 17 per cent, undervalues the shares. We reiterate our buy advice with a 196p price target.
