CareTech Holdings PLC (LON: CTH) – Upside Potential is Visible Through Organic Development and Consolidation.

CareTech Holdings PLC is FTSE AIM UK 50 Index listed social service care provider. The Company provides social care on behalf of health service commissioners and local authority across the United Kingdom. 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 & Wales and caters to 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



Segment Analysis

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)
 
Measuring Performance Against Strategic Objectives by Using Non-Financial KPIs

The Group has shown improvement across all key elements during the financial year 2019.
 

1. The overall care capacity enhanced by 2,457 (or 93.7 per cent increase 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 the 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)

Synopsis of Recent Developments

1. 15^th May 2020: In addition to Panmure Gordon as Nominated Adviser and joint corporate broker, the Group appointed Numis as a joint corporate broker for the Company.

2. 5^th February 2020: The Group completed the investment into AS Group by issuing 431,465 shares as consideration.

3. 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.

 
Top Shareholders Statistics
 
 

Financial Highlights – Strong Financial Performance in H1 FY2020 (31^st March 2020, GBP, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, the revenue increased by 8 per cent to GBP 208.5 million versus GBP 192.5 million in H1 FY2019. The underlying EBITDA surged by 14 per cent from GBP 33.3 million in H1 FY2019 to GBP 38 million in H1 FY2020. The underlying PBT (profit before tax) stood at GBP 25.9 million in H1 FY2020 versus GBP 20.7 million in H1 FY2019, reflecting an increase of 25 per cent. The reported PBT increased by 162 per cent to GBP 18.1 million in H1 FY2020 from GBP 6.9 million in H1 FY2019. The reported earnings per share stood at 9.82 pence, while underlying basic earnings per share stood at 18.44 pence for the period. The Net debt declined by 2 per cent to GBP 287.4 million in H1 FY2020 from GBP 293 million in H1 FY2019. The net assets increased by 7 per cent to GBP 353 million, and operating cash flow increased by 22 per cent to GBP 34.5 million in H1 FY2020. The interim dividend stood at 4 pence in H1 FY2020 versus 3.75 pence in H1 FY2019.

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


(Source: Annual 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 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.

Financial Ratios: Higher Profitability Margins versus Industry Median

 

The Occupancy rate for the financial year 2019 stood at 93 per cent, which was higher than 86 per cent reported in the financial year 2018. The reported EBITDA margin, Pretax margin and Net Margin stood at 18.6 per cent, 6.2 per cent and 5.1 per cent, respectively, for the FY2019 period. Reported profitability metrics were higher against the industry median. On the liquidity front, CareTech Holdings Plc’s current ratio was lower than the industry median of 1.09x, reflecting insufficient current assets to pay its short-term obligations. On the leverage front, the debt-equity ratio of the CareTech Holdings Plc’s was 0.96x, which stood slightly higher as compared to the industry median.

Share Price Performance Analysis


Daily Chart as on 18^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 18, 2020, at the time of writing (before the market close, at 11:35 AM GMT+1), CareTech Holdings Plc shares were trading at GBX 400.00, up by 2.30 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 502.00/GBX 285.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

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 Atrys Health SA (NTM Price/Cash Flow was 44.00), Integrated Diagnostics Holdings Plc (NTM Price/Cash Flow was 19.66), CVS Group Plc (NTM Price/Cash Flow was 17.96), Medica Group Plc (NTM Price/Cash Flow was 16.97) and Mediclinic International Plc (NTM Price/Cash Flow was 13.77). 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 18.07), CVS Group Plc (NTM Price/Earnings was 16.25), Spire Healthcare Group Plc (NTM Price/Earnings was 11.80), MD Medical Group Investments Plc (NTM Price/Earnings was 5.85) and Mediclin AG (NTM Price/Earnings was 2.45). The Average of Price/Earnings (NTM) of the company’s peers was 11.00x (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 6.67 per cent return as compared to negative 7.14 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 2.99 per cent, which is higher than the industry dividend yield of 1.25 per cent and the sector dividend yield of 1.15 per cent. This needs to be considered in view of the recent correction in the stock price.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

CareTech Holdings Plc has delivered a total return of 92.49 per cent in the last five years versus the total return of FTSE All share of 14.51 per cent for five years period.
 
Industry Outlook Dynamics

As per the report (published in July 2019) from Fortune Business Insights, the market size for home healthcare in the UK was valued at around USD 1.19 Billion in 2018, and it is expected to reach USD 1.95 billion by 2026, representing a compounded annual growth rate of around 6.5 per cent between 2019 to 2016. As per the study from Laing and Buisson in 2017, market size for UK social care for services related to Adults, Fostering, and Children & Young People stood at £9.5 billion, £1.6 billion, and £3.7 billion, respectively. In these three market segments, CareTech addressable market share is around 5 per cent, 3 per cent, and 8 per cent, respectively. The market is driven by three major trends – customer expectations, funding for healthcare and Access to skilled care workers. In the UK, the market is regulated by the Care Quality Commission (CQC), and the Office for Standards in Education, Children’s Services and Skills (OFSTED).


(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

Despite the economic turbulence, the Company reported a robust financial performance in H1 FY20 period, and it was in line with market expectations. It is highly cash-generative and profitable business, which reflected its resilience during the pandemic. The Group has witnessed a transformational change in the current period.  CTH focuses on its core business, and with the Cambian acquisition, the Group is well placed in the market to tap on the growth opportunities.
 

(Source: Presentation, Company Website)
 
 
Overall, 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 is 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 has shown strong financial performance with decent improvement in the revenue and adjusted EBITDA. The Company has got support from the Government along with additional funding to face 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 on revenue and EBITDA front compared to the fiscal year 2018. EBITDA margins were in line with the expectations of the market. Its quality ratings have also increased for its business, which showed its operational excellence. The Group expects continuous growth through the acquisition of Cambian and estimates a double-digit growth in an underlying EPS. The Company prospects are looking good, and it could provide an opportunity for investors to invest in the long term.
 
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 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 400.00 (as on 18^th June 2020, before the market close at 11:35 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 11.00x 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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