Care UK seeks more targets

Outsourcing in the health sector is proving a powerful engine of growth for fully listed Care UK and should continue to power it forward, unless present bipartisan political support for a private sector role somehow evaporates. The Colchester-based company’s shares have nearly trebled over the past three years on the back of its success in providing and running care homes, clinical care and community care facilities and other services for the National Health Service and local authorities.

Steered by chief executive Mike Parish, Care UK, which made £17.1 million pre-tax in the year to September 2006 on £199.4 million turnover, increased profits nearly 31 per cent to £11.6 million pre-tax in the six months to last March on interim turnover up 26.5 per cent to £118 million. Parish, who came to the business five years ago from US contract logistics group Exel, boasts that the company has built up healthcare contracts from scratch in three years to a current level of £200 million a year and now has ‘a leading position in outsourcing by the NHS and the Government’, with 20 per cent of centrally procured healthcare contracts in the UK.

For Care UK, whose whole raison d’être is to provide services more efficiently and cheaply than NHS or municipal direct-labour operations, operating margins are best in residential care, a market growing at 20 to 25 per cent a year, according to Parish. In the first half-year, the company made a 16.1 per cent margin on £45.2 million turnover in this area, compared with 10.2 per cent on £28.9 million in specialist care and 6.5 per cent on £28.5 million in community care.

At least as significantly, ‘we are still acquisitive’, declares Parish in the wake of Care UK’s March takeover of Mercury Health Holdings, which provides elective surgery, diagnostics and primary care to NHS patients and operates independent sector treatment and diagnostic contacts for the Department of Health. Headed by managing director Keith Evans and with Mark Smith as group strategy director, Mercury chalked up earnings before interest, tax, depreciation and amortisation of £2.6 million on £14.8 million turnover in the year to March 2006.

Care UK paid £31.5 million (partly in shares), is taking on Mercury’s net debt of £20.7 million and agreed to repay £24.6 million of inter-company debt when the takeover was completed. With its business now divided 50-50 between NHS and local authority customers, Parish says Care UK is looking at the home care field and is watching the private sector, where he thinks medical insurers might look to the company to make private hospitals more cost effective.

Joining the bidding for BUPA’s £1.4 billion hospital division would be ‘too big a leap in one direction’, admits Parish. He says Care UK could finance more modest acquisitions from its own resources, but concedes that ‘a big move, say from £10 million to £20 million, would need external funding’.

Looking ahead, Parish says, ‘A huge proportion of our income is contracted for between five and 25 years ahead,’ unlike many others in the sector. Moreover, Care UK has either freehold ownership or long leases on 75 per cent of its care homes.

Three-quarters of the company’s care home beds are contracted on a take-or-pay basis and the client pays whether they are occupied or empty. A tapering system applies, by which 95 per cent of beds are paid for on that basis in the first year of a contract, falling to between 50 and 75 per cent by the fifth year.

Analysts see pre-tax profits rising another £4.6 million this year to £21.7 million, with nearly £30 million on the cards for 2007-08. ‘We are looking for primary care trusts to embrace market reforms,’ comments Parish, ‘and strategic health authorities must follow their lead.’