Healthcare provider Cambian (CMBN) is anticipated to double earnings before interest, tax, depreciation and amortisation (EBITDA) to £40m by 2021 according to broker Liberum.

This step change in earnings is likely to be rewarded by the market and we believe it is worth taking advantage.

The company has become the leading provider of specialist behavioural healthcare services for children in the UK after selling its mature adult division for £366m to Cygnet Health Care.

Shares in Cambian have rallied by nearly 75% to 214.9p since the start of 2017, although we believe the share price has further to run as the business undergoes a transformation.

Liberum analyst Graham Doyle’s bullish earnings forecasts are underpinned by a de-leveraged balance sheet and simplified strategy following the sale of Cambian’s adult division.

‘Our base case for the current Cambian business assumes that by 2021, occupancy is at 82.5% and the group margin is 16.5%’ says Doyle.

Wise decision

In our view, it was a wise decision to sell the adult business as it wiped off all existing debt and gives Cambian the opportunity to pursue a more focused growth strategy.

The children’s services market is currently worth £7bn and is growing between 2% and 3% annually, according to Doyle.

The analyst says there are high barriers to entry and it is becoming increasingly outsourced as the private sector is now worth £3bn.

Cambian can take advantage of this market by using its impressive net cash of £116.7m to pursue acquisitions in a market that is not only hard to enter, but is also fragmented.

While £50m is earmarked for a special dividend this year, Cambian will still be left with more than £60m to fund future acquisitions.

As a market leader with a 10% to 12% chunk of the sector and debt-free, it looks well placed.

In the past, the company struggled after it was over ambitious in its expansion. It significantly increased organic investment resulting in higher development losses and a profit warning in October 2015.

And while Cambian is on the up for now, investors should be aware of risks that could stall its growth as Liberum’s bull case depends on several factors.

These include further outsourcing from local authorities, and an improvement in occupancy and margins. Cambian also needs to ensure it does not repeat previous mistakes by growing too quickly as this could lead to further hiccups in financial and operational performance.

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