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The care services provider has a clear policy to reinvest free cash flow into organic and acquisitive growth while maintaining a progressive dividend
Thursday 08 Jul 2021 Author: Martin Gamble

Having successfully integrated the strategic £374 million acquisition of Cambian in 2018 and reduced leverage below three times, leading care services provider CareTech (CTH:AIM) is well positioned to continue growing its share of a fragmented market.

Importantly, its significant freehold property portfolio is due to be revalued at the end of August which may provide a positive share price catalyst. The property is carried on the balance sheet at £774 million but was last valued in 2018.

Analysts at Numis argue that investors should take greater notice of the freehold property which represents hidden value and provides flexibility to reconfigure and optimise properties to meet local needs.

Since listing on the stock market in 2005, CareTech has grown revenues at a compound average growth rate of 22% per year and earnings per share by 17% per year.

This means profits have increased over 10-fold in the past 15 years. Meanwhile, cumulative dividends since listing have totalled 107.44p per share. Investors who bought in at the listing price would have seen their purchase cost reduced by 62% from dividend payments.

Despite the strong growth achieved over many years, CareTech estimates it has a market share of 6.4% in children’s and young people services and only 2.6% of the adult services market, implying a long growth runaway.

Essentially CareTech’s services enable children, young adults, and adults with complex needs to regain their independence and to work and engage in their communities.

The market opportunity is driven by the continuing trend to outsource specialist services from local councils while the underlying market itself is growing at 5.5% a year.

Demand is underpinned by increasing regulatory burdens, a shortage of specialist beds, a need to recruit, train and supply staff as well as favourable demographic trends.

At the recent half-year results, the company confirmed it had a significant pipeline of development for new sites and improvement within the existing portfolio.

The company has also identified a significant new opportunity to become a tech-enabled care management business.

The idea is to use the recent acquisition of Smartbox as a base to buy, build and partner to selectively develop a portfolio of technology assets. This side of the business is expected to make up a sizeable chunk of revenues within five years.

Trading at just 11.8 times expected earnings with double digit growth, CareTech’s shares look too cheap relative to the quality of the fundamentals and potential for a revaluation of the assets. Buy the shares now.

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