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CareTech side-steps challenges

Negotiating fee rises and avoiding the temptation to expand rapidly have helped the care home operator report another period of steady growth
June 15, 2018

Care Quality Commission (CQC) and Ofsted ratings are important to care home operators as it gives them more credibility when negotiating fee increases from local authorities. That’s why ‘good’ ratings on 87 per cent of CareTech’s (CTH) portfolio (ahead of the sector average of 71 per cent) is a major benefit. With such a highly-rated portfolio, the group is confident of negotiating a 2 per cent fee increase, which should offset the extra staff costs following the new living wage that came into effect in April this year.

IC TIP: Buy at 391p

CareTech also stands out above its fellow care home owners (many of which are private equity groups) with its sensible long-term expansion strategy. The reconfiguration of 15 existing sites and the addition of beds in new buildings helped expand the group’s capacity in the first half of the 2018 financial year, sending like-for-like revenues up 10 per cent. Meanwhile, the acquisition of Selbourne Care in June 2017 added eight new residential homes, meaning overall capacity rose 9 per cent to 2,572 beds.

Acquisitions aren’t baked into the forecasts from Panmure Gordon, but with £15.8m of operating cash inflows in the first half (from £16.3m of adjusted operating profits), the group has plenty of financial firepower for further purchases. At present, the broker expects pre-tax profits and EPS of £32.2m and 34.5p in the year to September 2018 (2017: £29.4m and 38p).

CARETECH (CTH)    
ORD PRICE:391pMARKET VALUE:£296m
TOUCH:385-391p12-MONTH HIGH / LOW:461p365p
DIVIDEND YIELD:2.6%PE RATIO:15
NET ASSET VALUE:275p*NET DEBT:71%
Half-year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201778.87.018.353.3
201887.68.468.623.5
% change+11+21+3+6
Ex-div:25 Oct   
Payment:23 Nov   
*Includes intangible assets of £83.4m, or 110p a share