Companies: CTH    CUK    PSPI    SCHE   

Healthcare is buzzing with change. Health secretary Alan Johnson has launched a six-month public debate on the future shape of care and support services in the UK, including the role of private-sector companies, as the nation adjusts to the prospect that in 20 years a quarter of Britain’s adult population will be older than 65 and the number of people over 85 will have doubled.

Inevitably, the funding implications are formidable and government and local authorities have embraced a greater role for the private sector in this area. Companies are keenly awaiting a forthcoming Green Paper on residential and social care funding, which is expected to reinforce a shift towards increased contributions from users and their insurance companies.

Businesses are also positioning themselves for the development of ‘extra care’ villages, designed specifically for communities of elderly people. Investment groups could also be brought into these projects.

At a time of persistent economic uncertainty, many see residential care companies as offering a haven of long-term growth, though their shares are mostly depressed in today’s gloomy financial and property climate. The resultant increase in supply, coupled with pressure on local authority budgets, can be expected to reduce annual fee increases from more than ten per cent to little more than the Consumer Price Index, according to a sector analysis from broker Brewin Dolphin.

Noting that shares in most of the quoted companies in this business are trading well below their stock market highs, Brewin argues this could be the time to take advantage by backing some of the sounder players. The key for companies will be maintaining high occupancy rates at a time when financial pressures are pushing a drive to more care at home, where possible, or into the ‘extra care’ environment.

Alternative models
Southern Cross Healthcare, which should be cushioned from that trend by its position at the acute treatment end of the market, is not alone in foreseeing more consolidation in the industry. The company has increased its acquisition war-chest by 80 per cent to £108 million after lifting first-half earnings 43 per cent to £31 million on turnover up 28.2 per cent to £431.2 million.

Southern Cross does not own its homes and charges for current rents and future rent rises combined with hefty payroll increases to turn that into an £8.6 million interim loss, though its bed numbers rose 14.4 per cent to 37,084 and its average weekly fee increased six per cent to £515. Chief executive Bill Colvin says the fee rise was ‘ahead of our expectations’ and occupancy rates, though down slightly, remained above 90 per cent.

With £14.2 million cash and a £32 million development loan, Southern has lifted the dividend 50 per cent to 3.75p a share. Colvin argues, ‘Landlords continue to show interest in financing our properties and costs remain under control.’

Care UK adopts a different model for its residential care operations, the largest and most profitable of its divisions. The company, whose £15.9 million hit on the cancellation of a key West Midlands National Health Service diagnostic contract shows the risks in public-sector business, owns its homes.

The group, which lifted interim turnover 41 per cent to £167 million, increased first-half operating profits 37 per cent, but the cancellation charge produced a £9.6 million interim loss. Undaunted, chief executive Mike Parish says Care UK is expanding its residential beds from 3,500 and is building new homes on greenfield sites around the country, providing complex ‘high-dependency services’, mostly outside the NHS.

With the homes on the books at cost, he suggests there is £120 million of hidden value there and is considering setting up a property company to support 500 or more beds and assessing a ‘property-based’ funding deal. This could be an alternative to using Care UK’s £52 million finance facility and £28 million cash.

A property approach
As its name suggests, retirement home specialist Public Service Properties Investments, which floated on AIM last year after raising £149 million (£31 million of it new money) at 150p, approaches the sector as a property investor, not an operator. Chairman Patrick Hall, unveiling reduced profits of £11.8 million for 2007 and net assets of 196.1p a share, argues, ‘Retirement care is supported by local and central government expenditure’ while ‘demographic trends point to continued growth and expansion’.

The company, which is making acquisitions with year-end debt standing at 58 per cent of claimed portfolio investment value, invests in Germany, as well as the UK, through its asset manager, the US-owned RP&C International, and is looking at Austria. RP&C’s Ralph Beney sees returns of eight or nine per cent, where the company’s equity component is 30 per cent.

Quoting average occupancy of 90 per cent or higher, he suggests retirement homes are less cyclical than mainstream property for demographic reasons – ‘Dementia is one of the fastest growth areas in the UK, which will keep the demand-supply balance right.’ Citing a ‘strong pipeline’, Beney says RP&C expects further sector consolidation.

Whatever fund managers may now think, residential care in different guises continues to attract the professionals. AIM-quoted CareTech Holdings, which provides learning disability care services and lifted pre-tax profits 64 per cent to £5.4 million last year, recently bought Beacon Care Holdings with 16 freehold residential care properties for up to £22.5 million.