CareTech Holdings PLC (LON: CTH) – Creating Value for Shareholders by Returning Tempting Dividends Over the Years

CareTech Holdings PLC is FTSE AIM UK 50 Index listed provider of education and specialist social care services. The Company provides social care services on behalf of the health service commissioners and local authority across the United Kingdom. It was founded in 1993 and listed over the LSE (London Stock Exchange) in October 2005 under the AIM market. It serves children and adults with over 250 specialist services regarding social care and education services. It serves across Scotland, England & Wales and caters to around 4,500 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 October 2018, the Group had acquired Cambian Group PLC (provider of children’s specialist education and behavioural health service) by acquiring the entire share capital. The Company has evolved through a mix of acquisitive and organic growth to established as one of the most reputable national specialist education and social care providers.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the May 2020 publication from the Grand View Research, the market size of the global home healthcare market is forecasted to reach US$515.6 billion by 2027. Meanwhile, according to the report (published in July 2019) from Fortune Business Insights, the market size for home healthcare in the UK was valued at around US$1.19 Billion in 2018, and it is expected to reach US$1.95 billion by 2026, representing a compounded annual growth rate of around 6.5% 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%, 3%, and 8%, 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

The Company has a spectacular track record of growing dividend, which is supported by the favourable demographics of the UK social care sector. Despite the economic turbulence, the Company reported a robust financial performance in H1 FY20 period, and it was in line with the market expectations. It is highly cash-generative and profitable business, which reflected the resilience during the pandemic. CTH is focusing on the core business, and with the Cambian acquisition, the Group is well placed in the market to tap on the growth opportunities. The Group continues to focus on providing innovative service solutions for delivering high value to commissioners.

 
 (Source: Presentation, Company Website)

However, there are several unique factors that could put hindrances in business operations, such as:

1. Inability to match the services with complex need of the service user as it can be communicated to Commissioners.

2. Aged service user requires extra attention from a skilled workforce, which is constantly regulated by government policies.

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

Segment Analysis

The Group bifurcates business operations into the following categories:

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

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

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


 (Source: Presentation, Company Website)

Synopsis of Recent Developments – Acquisition and Dividend Amid the Challenging Economic Conditions

18 June 2020: The Company announced an interim dividend of 4.0 pence after delivering the strong H1 FY20 performance.

15 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.

5 February 2020: The Company completed the acquisition of 51% stake in AS Investments Holding Ltd by issuing 431,465 equity shares to satisfy the initial consideration of the investment.

Measuring Operational Key Performance Indicators

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

1. The overall care capacity enhanced by 2,457 to 5,079 places in FY19 (FY18: 2,622).

2. Blended capacity stood at 80% in FY19 (FY18: 86%). 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% in CQC adult, 93% in Ofsted CareTech and 80% in Cambian, during the FY19.

 

 (Source: Annual Report, Company Website)

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, driven by fee increase and re-positioning of services to online, the revenue increased by 8 per cent to £208.5 million (H1 FY2019: £192.5 million). The underlying EBITDA surged by 14 per cent to £38 million in H1 FY2020 (H1 FY2019: £33.3 million). The underlying PBT (profit before tax) stood at £25.9 million in H1 FY2020 (H1 FY2019: £20.7 million), reflecting an increase of 25 per cent and reported PBT increased by 162 per cent to £18.1 million in H1 FY2020 (H1 FY2019: £6.9 million). The reported earnings per share stood at 9.82 pence, while underlying earnings per share stood at 18.44 pence for the period. The Net debt declined by 2 per cent to £287.4 million in H1 FY2020 from GBP 293 million in H1 FY2019. The net assets increased by 7 per cent to £353 million, and operating cash flow increased by 22 per cent to £34.5 million in H1 FY2020. The interim dividend stood at 4 pence in H1 FY2020 versus 3.75 pence in H1 FY2019.

Financial Ratios: Higher Profitability Margins versus Industry Median

The Occupancy rate for the first half of the financial year 2020 declined to 81 per cent (H1 FY2019: 87 per cent), despite the decline, the Group managed to keep occupancy rate at the decent level. Reported profitability metrics for the first half of the financial year 2020 were higher against the last year data for the same period, reflecting higher revenue generated and better control over expenses as compared to the H1 FY2019 data. On the liquidity front, CareTech Holdings Plc’s current ratio was lower than the industry median of 1.02, though the Company has sufficient current assets to pay short-term obligations. The Group managed to increase liquidity from last year data for the same period. On leverage front, the debt-equity ratio of the CareTech Holdings Plc’s was 1.19x, which stood lower as compared to the industry median, reflecting that the Company is less leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 16^th July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 16, 2020, at the time of writing (before the market close, at 11:14 AM GMT+1), CareTech Holdings Plc shares were trading at GBX 410.00, up by 0.24 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, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price to Earnings Approach (NTM)



To compare CareTech Holdings Plc with peers, Price/Earnings multiple has been used. The peers are Integrated Diagnostics Holdings Plc (Price/NTM Earnings was 18.50), CVS Group Plc (Price/NTM Earnings was 16.45), Spire Healthcare Group Plc (Price/NTM Earnings was 11.90), MD Medical Group Investments Plc (Price/NTM Earnings was 5.95) and Mediclin AG (Price/NTM Earnings was 3.30). The Average of Price/Earnings (NTM) of the company’s peers was 11.22x (approx.).

CareTech Holdings Plc Vs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, CareTech Holdings Plc share price has delivered 77.11 per cent returns as compared to 29.60 per cent returns of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

In the First half of the financial year 2020, the Group has shown a strong financial performance with decent improvement in 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 in all the aspects. The Group's performance was strong during the fiscal year 2019, and it had delivered excellent growth in revenue and EBITDA as compared to the fiscal year 2018. The EBITDA margins were in line with the expectations of the market. 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.

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 method, we have given a “Speculative Buy” recommendation at the current price of GBX 410.00 (as on 16 July 2020, before the market close at 11:14 AM GMT+1) with lower double-digit upside potential based on 11.22x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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