With demands on the NHS budget growing, the Government is shifting more services from hospitals to local medical centres. A succession of Government reports and white papers have deemed much of the existing estate of community medical facilities, although growing, too small or no longer fit for use. All of this is music to the ears of CareCapital, which develops the type of purpose-built buildings the Government is demanding. It is now profitable and offers investors asset value growth and earnings on a budget multiple for 2008.

CareCapital’s USP (unique selling point) is that once it has developed these facilities, it maintains the freehold, leasing the building to doctors, local authorities or pharmacy tenants. Most contracts are won from a recommendation or referral, with groups of doctors or primary care trusts approaching the company. ‘It’s not speculative,’ reassures chief executive Paul Stacey, ‘as we line up tenants and have contractual relationships with the bulk of them before we start the building process.’

Former hospital administrator Stacey co-founded the company with medical entrepreneur Dr Michael Sinclair in 1994 and brought the group to AIM in August last year, a move giving certain venture capitalist backers an exit. Originally centred purely on the UK, CareCapital has made a foray into Germany, where recent legislative changes are encouraging the development of primary care facilities. The return on capital in Germany is not only better, due to lower borrowing costs and higher rents, but the construction process is quicker because of more efficient bureaucracy and building methods.

Equally important is the fact that the UK is moving towards the German model of creating mixed-use developments, or ‘polyclinics’, where various ancillary buildings are included in a site alongside a doctor’s surgery. The group’s experience in Germany gives great competitive advantage in the UK, a fact borne out by CareCapital’s recent contract with Coventry Council to build a medical centre with physiotherapy, library, leisure facilities and central atrium all incorporated.

Furthermore, upward rent reviews every three years are driving regular growth in the company’s portfolio values. Its investment portfolio – bulging with 21 UK centres and three in Germany – increased in value by 56 per cent during the half to June to £33.5 million, swelling net assets 29 per cent to 22p a share. The existing rent-paying assets in Germany have yet to be revalued and Stacey expects ‘a few million pounds’ to be added when these are assessed later this year. On top of that, the group’s development portfolio includes nine more UK sites and four more in Germany, presently worth £54 million and all expected to be completed by early 2010.

Stacey anticipates that once that current development is complete, the property portfolio ‘will be worth £100 million gross’ – and a sizeable pipeline of opportunities in the UK and Germany adds further allure.

Investors are buying into a business that effected an interim turnaround from losses to pre-tax profits of £675,000, with rental income rising 53 per cent to £950,000 and gearing standing at 55 per cent for the UK portfolio and 86 per cent for the German.

Analysts see this sub-sector, a hive of activity at present, as a relatively safe haven backed by Government policy. CareCapital’s business model of both developing and holding onto the freehold is uncommon, if not unique, meaning the company benefits from the uplift from development as well as the rising value of the property as rents trek north and net asset value increases as debt is paid down.

House broker Daniel Stewart predicts the shares, below their 30p issue price following recent market upheaval, will be more than 90 per cent backed by net assets by December 2008.

Strongly asset backed and trading on a miserly price to earnings ratio of less than seven times for 2008, a re-rating looks to be due.

CareCapital	AIM	£4.9m	6.38p	0.00p
Click here for interactive charting
Other company articles:
CareCapital’s healthy earnings and asset growth			05/10/2007
Newcomer - CareCapital			04/08/2006