Key Investment Opportunities
 

1. CareTech Holdings PLC (LON: CTH) is a Health Care Equipment & Services company that provides stable, reliable, and safe social care solutions.

2. The Company provides services ranging from specialised residential care to high quality fostering agencies for young people and children through four business segments being Foster Care and Family Services, Mental Health, Young People  Residential Services and Adult Learning Disabilities.

3. The Group has a long-established model of Social Care with Government support. It has the potential to consolidate the fragmented market and boost the business growth trajectory.

4. CTH is exploring bolt-on acquisition opportunities to expand the market share and geographical presence.

5. The Company has been profitable and cash generative with 25 years of experience, above-average ratings, and staff retention. Therefore, it has a substantial capability to capture organic and external opportunities.

6. The acquisition of Cambian is set to deliver pre-tax profit synergies of £5 million in FY2020.

7. CTH’s management team includes professionals having experience in commercial, charities, health, and social services sectors.

8. The Company’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.

9 The Group has a strong revenue growth trajectory with a decent operational performance for the current period.

10. Health Care sector has shown resilience during tough times as we all are facing due to novel coronavirus crisis. In view of sustainable business model and growth story of CTH, we believe there is an excellent opportunity to buy this health care stock with a long term perspective.
 

CareTech Holdings PLC (LON: CTH) has evolved through organic and acquisitive growth. Currently, it is operating resiliently with a robust financial position.

CareTech Holdings PLC is a social service care provider. It was founded in 1993 and listed over the LSE (London Stock Exchange) on 12^th October 2005 under the AIM market. It serves children and adults with over 250 specialist services regarding social care and education services. It provides services across Scotland, England and Wales and caters over 4,000 children and adults across 550 locations. The Group employs over 10,000 people and provides services related to Adult learning disabilities & specialist services, Children's residential & education services, and foster services. On 19^th October 2018, the Group had acquired Cambian Group PLC (provider of children’s specialist education and behavioural health service) by taking its entire share capital.



(Source: Presentation, Company Website)

Key Fundamental Statistics



Segments at a Glance

The Group splits the business into three categories:
 

1. Adult Services: Comprises services related to Mental Health, Learning Disabilities, Autism and Aspergers, Physical disabilities, Brain injury rehabilitation, among others.

2. Children’s Services: Provides services related to Autism spectrum conditions, Education and therapeutic support, Young people in crisis, among others.

3. Fostering: Caters to Learning disabilities, Therapeutic foster placement and Challenging and complex behaviour.
 

(Source: Presentation, Company Website)

Top Shareholders Statistics

 

Key Performance Indicators - Non-Financial Performance Metrics in 2019

1. The overall care capacity enhanced by 2,457 (from 2018) and stood at 5,079 places in 2019.

2. Blended capacity stood at 80 per cent in 2019 as against 86 per cent in 2018. The decline was primarily impacted by the lower occupancy of the Cambian business.

3. Quality is judged by regulatory ratings which stood at 95 per cent in CQC adult, 93 per cent in Ofsted CareTech and 80 per cent in Cambian.
 

 
(Source: Presentation, Company Website)

Significant Developments of 2020

1. 5^th February 2020: The Group completed the investment into AS Group by issuing 431,465 shares as consideration.

2. 13^th January 2020:The Group appointed the new Chief Financial Officer (CFO), Christopher Dickinson, with an immediate effect. He took over the position from the interim CFO (appointed on 10^th December 2018), Gareth Dufton.
 

H1 FY2020 Trading Update – Showing Resilient Performance

1. On 22^nd April 2020, CareTech Holdings released a trading performance update for the first half of the financial year 2020 ending 31^st March 2020. The group’s overall performance remained in line with the expectations of the market and generated strong revenue & EBITDA versus H1 FY2019.

2. The Net Debt stood at GBP 287.4 million as on 31^st March 2020 versus GBP 291.1 million as on 30^th September 2019. The cash balance stood at GBP 35 million with GBP 25 million of an undrawn revolver. Significant headroom available with respect to company’s existing bank facilities and covenants.

3. The Company has a strong investment pipeline and remained on track to deliver PBT (profit before tax) of GBP 5 million in the FY2020.

4. The Group is committed to ensuring the health and safety of its employees and at present, operations are not materially impacted by the covid-19 outbreak.

5. The Public Health England, the NHS, and Local Authorities are being very supportive towards the social care sector and make sure proper funding is available for operational continuity.

6. CareTech is proactively supporting its staff and launched CareTech Covid-19 Fund to support staff and users with up to GBP 1 million cash. 

Financial Highlights – Strong Revenue Growth in Financial Year 2019 (31st October 2019)


(Source: Annual Report, Company Website)
 

1. 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.

2. Driven by sales growth, its EBITDA increased by 67.4 per cent to £73.5 million in FY2019 from £43.9 million in FY2018.

3. 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.

4. The underlying basic earnings per share were up by 7 per cent from 35.10 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.

5. The final dividend in FY2019 was at 7.95 pence versus 7.50 pence in FY2018, an increase of 6 per cent.
 

Financial Ratios: Higher Profitability Margins versus Industry Median

 

The reported EBITDA margin, Operating Margin, Pretax margin and Net Margin stood at 18.6 per cent, 9.9 per cent, 6.2 per cent and 5.1 per cent, respectively, for the FY2019 and were higher than the respective industry median. The Return on Equity of 7.3 per cent in the financial year 2019 stood lower than the industry median of 7.5 per cent. However, it was significantly higher against the last period data. On the liquidity front, CareTech Holdings Plc’s current ratio was lower than the industry median of 1.06, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the CareTech Holdings Plc’swas 0.96x, which was same as compared to the industry median.

Share Price Performance Analysis


Daily Chart as on 14^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 14, 2020, at the time of writing (before the market close, at 8:44 AM GMT+1), CareTech Holdings Plc shares were trading at GBX 403.30, down by 0.91 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 502.00/GBX 285.00.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Method 1: Price to Cash Flow Approach (NTM)

 

To compare CareTech Holdings Plc with its peers, Price/Cash Flow multiple has been used. The peers are Medios AG (NTM Price/Cash Flow was 42.55), Animalcare Group Plc (NTM Price/Cash Flow was 23.60), CVS Group Plc (NTM Price/Cash Flow was 17.47), Integrated Diagnostics Holdings Plc (NTM Price/Cash Flow was 14.59) and Medica Group Plc (NTM Price/Cash Flow was 14.23). The Average of Price/Cash Flow (NTM) of the company’s peers was 22.50x (approx.).

Method 2: Price to Earnings Approach (NTM)

 

To compare CareTech Holdings Plc with its peers, Price/Earnings multiple has been used. The peers are Integrated Diagnostics Holdings Plc (NTM Price/Earnings was 12.35), Totally Plc (NTM Price/Earnings was 10.70), Mediclinic International Plc (NTM Price/Earnings was 10.41), MD Medical Group Investments Plc (NTM Price/Earnings was 9.58) and Animalcare Group Plc (NTM Price/Earnings was 9.45). The Average of Price/Earnings (NTM) of the company’s peers was 10.50x (approx.).

Valuation Metrics


(Source: London Stock Exchange)
 
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 are driving ROE.

CareTech Holdings Plc Vs FTSE AIM 100 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last year, CareTech Holdings Plc share price has delivered 15.89 per cent return as compared to negative 16.36 per cent return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last year.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

CareTech Holdings Plc has a dividend yield of 2.87 per cent, which is higher than the industry dividend yield of 1.37 per cent and the sector dividend yield of 1.22 per cent.

Total Return for 5 Years


(Source: Refinitiv, Thomson Reuters)

CareTech Holdings Plc has delivered a total return of 94.57 per cent in the last five years versus the total return of FTSE All share of 3.93 per cent for five years period.
 
Industry Outlook

As per the data from Laing and Buisson report, the total market value is estimated to be worth around £6 billion for the care of adults (below 65 years of age) in the learning disability & specialist services categories and approximately £7 billion for children’s services. Adjacently, the market size of Foster Care worth around £1.95 billion (across England) and growing 5.2 per cent annually. The market is driven by three major trends – customer expectation, funding for healthcare and Access to skilled care workers. In the UK, the market is regulated by the Care Quality Commission (CQC), Children’s Services and Skills (Ofsted) and the Office for Standards in Education.

Growth Prospects and Risk Assessment
 
The Group has witnessed a transformational change within the Group. It is reflected in its trading performance, which is ahead of market expectations.  The Company has delivered on all of its metrics. CTH 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. 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 may act as a hindrance in the near term. Any changes in government policy or legislation could impact the operating performance.
 
Social care is usually not a perilous business proposition; however, there are several unique factors that could put hindrances in business operations such as:
 

1. Aged service user requires extra attention from a skilled workforce which are constantly regulated by government policies.

2. Matching the services with complex need of the service user as it can be communicated to Commissioners.

3. Health and safety breach can significantly impact the reputation of the brand.

4. As Commissioners regularly review the services, it must be served at a fair value.

5. Adequate funding and debt facilities are required to keep the business functioning, which needs to be managed carefully.
 

Business Outlook Scenario

In the first half of the financial year 2020, the Group is expecting a strong revenue and EBITDA growth. The Group has got support from the government along with an additional funding to face challenges during such uncertain times. CTH remained on track to achieve synergies of GBP 5 million of profit before tax in FY2020. The Company has made the acquisition of Cambian in October 2018, which augur well for the group 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 metrics as compared to the fiscal year 2018. The EBITDA margins of the CareTech business were in line with the market expectations. Its quality ratings have also increased for its business, which showed its operational excellence. The Group expect continuous growth through the acquisition of Cambian and anticipate double-digit growth in underlying EPS. The business prospects are looking good, and it could provide an opportunity for investors to invest in the stock with a long term horizon.

Most of the social care service providers have lesser than three services, CareTech provides various services under adult care, children and fostering and have the potential to consolidate the market through acquisition and partnerships. The Group has maintained a quality rating for both CQC and Ofsted, which reflects their ethical standards and value-based approach. Moreover, the acquisition of Cambian has delivered £3 million of pre-tax profit synergies in FY2019 and set to yield £5 million of additional synergy in FY2020.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 149 million in FY16 to GBP 395 million in FY19. Compounded annual growth rate (CAGR) stood at 38.40 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 401.00 (as on 14^th May 2020, before the market close at 11:36 AM GMT+1) with lower double digit upside potential based on 22.50x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.) and 10.50x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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