Poor capital allocation has hurt Cambian (CMBN) before. In 2016 the care home operator breached its banking covenants after failing to make enough profit to cover its net debt position. This time, its failure to properly distribute cash appears to be more serious. Three of its care homes have been featured in an ITV (ITV) documentary, alleging inadequate levels of care and education for children and poor training and support for staff.
The programme, Who Cares? Children’s Homes Undercover, sent an undercover reporter into work at one of the group’s specialist residential schools in Shropshire, which reportedly charges parents £4,800 a week. While there, one member of staff was filmed saying that the home was “awful”, and that meal budgets were underspent while other employees said that poorly performing homes were temporarily closed to avoid failing their Ofsted inspections.
In a response issued ahead of the programme's broadcast, Cambian said that over 80 per cent of its 220 homes earned ‘good’ or ‘outstanding’ ratings when routinely assessed by Ofsted. However, since receiving notice of the programme in November, three facilities have had their registrations suspended for up to three months after Ofsted identified concerns. The group is assessing the quality of care provided both internally and with the help of independent advisers, but thinks the events “will have no material financial impact in 2017”. Shares in the care provider fell by as much as 15 per cent on the day of Cambian's statement.
Reputational damage is another matter. ITV’s programme shows money being given to an underage boy to buy tobacco, goading and public humiliation of a teenager and a mis-reported physical intervention. Moreover, if deep-rooted issues regarding the payment and support of staff, activities and meal budgets are exposed, this could lead to long-term costs. Cambian recently sorted out its debt issues by selling its adult care division, but its remaining children’s care service has long struggled with poor margins and exorbitant costs. In the six months to June 2017 the group reported an adjusted cash profit margin of just 8.3 per cent and operating losses of £1.2m off £101m of revenues. This compares with a 23 per cent adjusted cash profit margin, £10.7m of operating profits on £78.8m of revenue at closest peer CareTech (CTH).
