CareTech's move to modernise drives profits

Social care company CareTech (CTH) cited “considerable resilience” in its half-year report as it posted underlying cash profit growth of almost a fifth to £49.4m on the back of strong revenue growth. A very small proportion of the 5,000 adults and children who use its services are deemed ‘high risk’ by the NHS, helping it to keep all of its 550 sites open during the coronavirus pandemic.

“Covid-19 has highlighted the importance of having community based, high quality social care facilities to relieve the pressures on the NHS”, said executive chairman Farouq Sheikh.

The group’s top line improvement was buoyed by a combination of organic growth and the acquisition of a majority stake in Smartbox last October – something Sheikh depicted as a “significant milestone”.

Smartbox makes software and hardware that provides communication aids, environmental control devices, computer control technology and interactive learning for disabled people with speech difficulties. “Our belief is that digital adoption will play a significant role in enhancing the independence of our service users”, said Sheikh.

CareTech’s adults’ services business posted revenue growth of more than a quarter to £83m with cash profits up 12 per cent. The group attributed that “robust” performance to cost management and lower agency usage, though the profit margin dropped slightly from 25.5 per cent to 22.8 per cent.

Meanwhile, revenues rose roughly a tenth to £134m within the group’s children’s services division. Management pointed to longer stay placements here and fee increases helping to support margins.

Net debt dropped from £269m to £263m as at 31 March, while adjusted net cash stood at £49.2m – up from £38.2m. Operating cash flow conversion at the period-end stood at 99.7 per cent. The group directed that cash towards buying 17 new developments, the purchase of Smartbox and to transfer of seven highly specialised adult service facilities from The Huntercombe Group in November.

Looking ahead, management is optimistic about expanding in the UK and in the Gulf region, where it also has offices and investments. Lending weight to that positive sentiment, it has raised its interim dividend to 4.6p a share (up from 4p).

Aim-traded shares in CareTech ticked up roughly 2 per cent in morning trading on results day. They are up more than a half over the past 12 months. Based on brokerage Numis’s expectation of EPS of 50.3p in FY2021 (up from 44.9p in FY2020), CareTech’s forward price/earnings (PE) multiple sits at 12 times. Hold.

Last IC view: Hold, 481p, 3 Dec 2020