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Cambian buoyed by CareTech approach

The two care homes may operate in similar areas of the market, but stark differences in management have resulted in very dissimilar success rates
July 11, 2018

Care home operator CareTech (CTCH) doesn’t shy away from mergers and acquisitions. It doesn’t need to. With £10m of cash, headroom in the banking facilities and an average cash conversion rate of 91 per cent since 2013, it’s got the financial firepower for takeovers. It has also proved adept at acquisitions and integration. The purchase of new properties (or old ones that need regenerating) has helped spark compound annual revenue growth of 8 per cent in the past five years. 

IC TIP: Hold at 376p

And yet a potential merger with peer Cambian (CMBN) has set alarm bells ringing. The target confirmed that it had rejected an initial 220p cash-and-shares offer, but remains in talks with the buyer. For sensible, steady CareTech we’re worried this might be a takeover too far. 

For a start, the target isn’t exactly a bargain. At 220p, the initial offer values Cambian at £405m, or 11.4 times adjusted cash profits. That’s a considerably higher valuation than high-quality, cash generative, dividend-paying CareTech currently commands. Media outlets have speculated that management could end up offering £600m, which would be more than double Cambian’s share price on the day before the offer was made.

What’s more, the target is also only just emerging from an intense period of challenges and mis-management, which culminated in the sale of its higher quality adult division last year. The remaining business – which owns and runs homes for children with specialist needs – reported an adjusted operating profit margin of just 1.2 per cent in the year to December 2017, compared with 20.2 per cent at CareTech. True, Cambian's management reinstated the dividend last year, but the promised earnings have yet to materialise.

Cambian also continues to battle regulatory problems after one of its care homes appeared in a documentary about serious failings at children’s care home operators. That’s a stark contrast to the ethos at CareTech, where management takes great pride in its excellent ratings from the Care Quality Commission and Ofsted.