Caretech Holdings (CTH)

 

Unstoppable Caretech worth a fiver

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Unstoppable Caretech worth a fiver

A subject close to many people's hearts, social care is rarely out of the headlines, often for all the wrong reasons. Most recently, the topic generated headlines during the recent general election campaign and Theresa May's manifesto gaff.

With almost everyone likely to know someone in need of care, whether in early life or old age, there's a growing crisis around who will pay, with many of us failing to save enough for vital care.

It's a growing industry as more of us live longer, and should be lucrative for care providers. But recently it's been rocked by scandal. It made headlines in 2011 when Southern Cross went bust. As well as specific internal issues, the failure came during a government crackdown on public spending.

During that time, sector heavyweight Caretech (CTH) lost over three-quarters of its value. The Kent-based firm floated at 160p in October 2005 and quickly surged fourfold to a high of 622p in mid-2007, before ending 2011 well below one pound.

But, following a "high level review" of services and standards of care, and as one of the largest and best-financed providers in the sector, Caretech staged an incredible recovery. It's been plain sailing ever since, and the share price is up almost 500%.

And momentum was sustained Monday as stellar first-half results had Caretech up another 3% at 437p. Analysts have upgraded forecasts for the next three years, and one thinks the stock is now worth a fiver.

Caretech said underlying pre-tax profit grew by 14% to £13.1 million in the six months to March on revenues up 11% to £78.8 million. Meanwhile, underlying diluted earnings per share (EPS) rose 11%, to 16.4p, and the interim dividend was bumped up 10% to 3.3p.

Broker Panmure Gordon raised expectations for revenue and cash profit in 2017 by 1% and 3% respectively and by 4% and 3% for 2018. WH Ireland said it had kept 2017 forecasts unchanged, but raised earnings expectations for 2018 and 2019 by over 3%.

A recent over-subscribed share placing at 355p raised £37 million, which long-serving executive chairman Farouq Sheikh said would help fund its pipeline of acquisition opportunities and support growth.

And they wasted no time on the former, Spending £20.7 million on Selborne Care, a provider of specialist residential care based in the Midlands, and Beacon Reach, a former school for pupils with learning difficulties based in Preston.

With around £60 million of available capital still to burn, Sheikh confirmed more deals were likely, with a number "under active consideration". It also has a "strong organic pipeline", he added.

"The directors believe that this will lead to a sustained growth in capacity and revenues, which will generate additional EBITDA and cash so that the group can achieve its target of double-digit growth annually in underlying diluted EPS."

Analysts were happy with the Selborne buy, given it complements Caretech's current portfolio and offers significant strategic benefits and growth prospects for its children's services division.

Panmure analyst Dr Julie Simmonds says Caretech is "well positioned" to take advantage of sector consolidation, raising her price target for the stock modestly to 470p – just ahead of finnCap's 465p.

"Improving fee levels, which cover the increase in staff costs from the introduction of the National Living Wage, add certainty to both revenues and costs and the continuing rise in regulation makes it increasingly challenging for smaller operators," she says.

WH Ireland is more bullish, though, sticking a £5 target on the stock with shares trading on a 2018 forecast price/earnings (PE) multiple of 12.1 times and EV/EBITDA of 10.6 times.

Analyst John Cummins sees scope for further outperformance over the next 12 months, while further acquisitions "should enable us to raise our forecasts further in due course".

Caretech has not breached a fiver since early 2008, but the direction of travel is most certainly north, and the stock has already breached the 62% Fibonacci retracement of the decline from over £6 to the 75p low.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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