Investment Summary
 

1. Caretech Holdings Plc has an established business model of social care with increasing demand in the independent sector.

2. The increased demand to look after children and adults would enhance the company’s business. More focus on learning disabilities, mental health and special education needs would benefit the business of Caretech.

3. The company operates in a fragmented sector with room for consolidation.

4. There is a huge market opportunity in Social care segment with government support, which would boost the business growth trajectory.

5. Stock is trading at an attractive P/E multiple of 25.3x, which shows that the company is undervalued at current levels.

6. The group is focusing on the opportunities in the Gulf region and are in advanced discussions with a potential partner which could grow its reach.
 

 
Business Overview

Caretech Holdings Plc (LON: CTH) is a Health Care Equipment & Services company that provides stable, reliable and safe social care. The company’s management team includes professionals having experience in commercial, charities, health and social services sectors. The company provide services ranging from specialized residential care to high quality fostering agencies for young people and children. The company’s operations are divided into three reportable segments being Foster Care and Family Services, Young People Residential Services and Adult Learning Disabilities (including Mental Health).

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

A Glance at the company


(Source: Preliminary Presentation, Company Website)

In the children’s services, the company has the capacity of 1,933 persons with 245 residential sites and 47 educational facilities. In Foster care segment, the Group has the capacity of 1,178 persons with presence in 11 locations while in Adult Services, the company has the capacity of 1,968 persons with presence in 208 sites.

Robust Business Model


(Source: Preliminary Presentation, Company Website)

The company’s business model focuses on the revenue generation and profitability from its operations in each segment.

Group’s Strategy Delivering Excellence

The Group is divided into three parts:
 

1. Build the industry’s best leadership and workforce

The company has employed approximately 9,000 qualified and skilled care workers, foster carers, teachers and managers, which constitute the success of the company and the care it provides.
 

2. Achieve high occupancy through matching

The Group’s strategy is to offer a strong national presence with local brands and regional service delivery points. This supports the development of local relationships while offering the comfort and security of a well-resourced and strong Group.
 

3. Provide the best quality ratings

The driver for social care is an organisation’s ability to deliver high-quality care, with reliable outcomes at a fair price. Caretech offers the best possible balance between quality and value and understands the need for progressive thinking and innovation to deliver results.

Growth Factors

(Source: Preliminary Presentation, Company Website)

The growth factor of the company are its high-quality services, capacity and customer confidence in the Group.

Market Outlook and Growth Opportunities


(Source: Preliminary Presentation, Company Website)

Caretech has a huge potential and opportunity to tap on the UK’s social care sector.

Recent Projects Underway


(Source: Preliminary Presentation, Company Website)

Recent News

On 13^th January 2020, the company announced that it had appointed Christopher Dickinson as Chief Financial Officer of the Group. He had joined the Group with immediate effect.

A Surge in Revenue and EBITDA in Financial Year 2019


(Source: Preliminary Report, Company Website)

In the financial year 2019, driven by a significant performance from the recently acquired Cambian business, the company's revenue increased by 113 per cent and stood at £395 million from £185.7 million in FY2018. Driven by sales growth, its underlying EBITDA increased by 68 per cent to £73.5 million in FY2019 from £43.9 million in FY2018. The company’s underlying PBT (Profit before tax) surged by 53 per cent to £50.2 million in FY2019 from £32.90 million in FY2018. The company’s statutory PBT increased by 58 per cent to £24.3 million in FY2019 from £15.4 million in FY2018. The underlying basic earnings per share were up by 7 per cent from 35.07 pence in FY2018 to 37.60 pence in FY2019. The statutory earnings per share were up by 31 per cent from 14.07 pence in FY2018 to 18.38 pence in FY2019. The final dividend in FY2019 was at 7.95 pence versus 7.50 pence in FY2018, an increase of 6 per cent.

Key Performing Indicators

Revenue


(Source: Preliminary Presentation, Company Website)

The Group’s revenue witnessed a growth of 21 per cent on a CAGR basis from FY2005 to FY2019.

EBITDA


(Source: Preliminary Presentation, Company Website)

The Group’s EBITDA witnessed a growth of 25 per cent on a CAGR basis from FY2005 to FY2019.

EPS


(Source: Preliminary Presentation, Company Website)

The Group’s EPS witnessed a growth of 16 per cent on a CAGR basis from FY2005 to FY2019.

Financial Ratios 
 
 
(Source: Thomson Reuters)

The reported EBITDA margin in FY19 was 18.60 per cent against the industry median of 15.50%. The reported operating margin was 9.90 per cent for the FY19. Net margin reported was 5.10 per cent for the fiscal year 2019, higher from the industry median of 3.7%. Return on equity for the same period stood at 7.30 per cent. On the liquidity front, Caretech Holdings Plc’s current ratio stood at 0.81x. On leverage front, the debt-equity ratio of the Caretech Holdings Plc’s was 0.96 i.e. the company is slightly more leveraged than the industry with a debt-equity ratio of 0.93.

Share Price Performance


Daily Chart as on 2^ndApril 2020, before the market closed (Source: Thomson Reuters)

On April 2, 2020, at the time of writing (before the market close, at 10:35 AM GMT), Caretech Holdings Plc shares were trading at GBX 379.86, up by 1.84 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 502/GBX 285. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.5898. The outstanding market capitalization was around £418.41 million.

From the technical standpoint, 14 days-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)




To compare Caretech Holdings Plc with its peers, Price/Earnings multiple has been used. The peers are MD Medical Group Plc (NTM Price/Earnings was 6.47), Spire Healthcare Group Plc (NTM Price/Earnings was 10.84), Medica Group Plc (NTM Price/Earnings was 12.64), CVS Group Plc (NTM Price/Earnings was 14.83), Animalcare Group Plc (NTM Price/Earnings was 12.98) and Totally Plc (NTM Price/Earnings was 6.71). The average of Price/Earnings (NTM) of the company’s peers was 10.74x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Caretech Holdings Plc with its peers, Price/Cash Flow multiple has been used. The peers are Integrated Diagonistics Holdings Plc (NTM Price/Cash Flow was 11.01), Mediac Group Plc (NTM Price/Cash Flow was 11.20), Animalcare Group Plc (NTM Price/Cash Flow was 20.86) and Medios AG (NTM Price/Cash Flow was 42.54). The average of Price/Cash Flow (NTM) of the company’s peers was 21.40x (approx.).

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s EV/EBITDA multiple is 10.8x which was lower as compared with the industry, which shows that the company is underpriced than the industry and the company’s P/E multiple is 25.3x, which was lower as compared with the industry which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Caretech Holdings V/S FTSE-AIM 100 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, Caretech Holdings Plc share price has gained 11.68 per cent return as compared to 29.18 per cent decline of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield

(Source: Thomson Reuters)

Caretech Holdings Plc has a dividend yield of 3.14 per cent, which is higher than the industry dividend yield of 2.46 per cent and the sector dividend yield of 2.58 per cent.

Caretech Holdings V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, Caretech Holdings Plc share price surged by 11.68 per cent while the industry’s performance declined by 37.64 per cent and the sector’s performance grew by2.25 per cent.

Caretech Holdings Total return - 1 year


(Source: Thomson Reuters)

In the last one year, Caretech Holdings Plc has delivered a total return of 14.71 per cent while the FTSE All share index has delivered a total return of negative 21.92 per cent.

Growth and Risk Assessments

There are some principal risks associated with the company’s business. Failure to deliver high standards of care could affect the reputation of the Group. Failure to comply with regulations and legislation could hamper the operations of the company. Failure in attracting, retaining and developing talent could hamper the long-term objectives and development of the Group. Any changes in government policy or legislation could impact market opportunities and operating performance of Caretech. Maintaining occupancy levels is a big challenge and could impact the performance of the company. Failure to meet Funding for current and future business requirements could hamper the business and growth of the Group. However, the Group has witnessed a transformational change within the Group which is reflected in its trading performance which is ahead of market expectations.  The company has delivered on all of its metrics. The Group focuses on its core business, and with the Cambian acquisition, the Group had placed itself well in the market to tap on the growth opportunities.

Conclusion

In the financial year 2019, the Group has delivered a strong financial performance with growth in top-line as well as in bottom-line. The company has made the acquisition of Cambian in October 2018, which augur well for the company in all the aspects. The Group's performance was strong during the fiscal year 2019, and it had delivered excellent growth in its revenue and EBITDA compared to the fiscal year 2018. The EBITDA margins of the Caretech business were in line with market expectations.The Group reported that synergies of £3m of profit before tax had been achieved, which showed the success of the acquisition. Its quality ratings have also increased for its business, which showed its operational excellence. The Group expected continuous growth through the acquisition of Cambian and anticipated double-digit growth in underlying EPS. The company prospects are looking good, and it could provide an opportunity for the investors to invest in the long term.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the closing price of GBX 373 (as on 1st April 2020) with lower double-digit upside potential based on 21.40x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.) and 10.74x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.), given the risks and uncertainties associated with the company’s business as mentioned above.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
* The “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 2nd April 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.