Have a care for Caretech

Social work and care home provider Caretech (CTH) looks to be on course to hit full-year forecasts after acquisitions and lower rental payments helped underpin a trend towards higher profit margins. This was despite the fee pressure the sector has endured over the past couple of years as councils look to cut spending. Management also confirmed in a pre-close trading update that its recent acquisition of several properties it had previously rented will lead to rental savings of £4.4m in the financial year to September 2014, compared with the £1.6m cost of interest payments on loans associated with buying the properties.

The company has always argued that owning its properties outright puts it at less risk when it comes to spending cuts in the sector, and this analysis was further confirmed by a report from healthcare intelligence consultants Laing & Buisson. The consultant looked at the state of the care market in the UK in the first half of the year and tried to assess the direction that spending has taken. The analysis showed that, while growth rates slowed in the sector, overall funding has changed very little during the period. In fact, although spending on care home services has dropped from £3.9bn to £3.7bn in the past couple of years, the difference has often found its way into the sort of supported care that Caretech specialises in, the consultants said.

Caretech will report its preliminary results in early December.

Investec says...

Hold. With results expected to be in line with expectations and our forecasts at the bottom of consensus, we make no changes to our numbers and still expect underlying pre-tax profits of £18.1m, giving EPS of 27.8p. The risk to forecasts seems to be lessening and we up the multiple used in our enterprise value to cash profits ratio to drive the target price up from 214p to 230p, in line with the current share price. However, the recent share price rise has captured much of the near-term upside potential and we suspect the shares may mark time, for now. We therefore downgrade our recommendation from 'buy' to 'hold'.

CannacordGenuity says...

Buy. Caretech's borrowing levels still appears high at over six times cash profits, but this is artificially inflated as cash profits do not yet reflect the switch from rental payments of circa £4.4m to interest payments of £1.6m following the freehold acquisition. So, on a rolling basis, we estimate the gearing ratio is closer to five times cash profits. In addition, with over five times interest rate cover, Caretech can easily service its debt. Caretech is still in a strong position with demographics continuing to increase market demand for its services and more realistic local authority fee negotiations reducing the risk of dilution of margins. We maintain our 'buy' recommendation and 275p price target.