10/07/2006
Claimar supplies care services to the elderly and infirm in their own homes under long-term contracts with local authorities throughout the Midlands and North West, and ticks every box an exciting, growing small cap company should.
Led by energetic chief executive Mark Hales, the company is a proven operator in a market not only burgeoning on the back of demographic trends, but also undergoing frantic consolidation. Headquartered in Birmingham, Claimar has already demonstrated an ability to identify and swiftly integrate acquisitions.
Significantly, the group has a strong recent record of delivering high levels of growth at the top line while simultaneously maintaining a decent level of profitability. ‘Our key message to investors,’ enthuses Hales, ‘is that you can grow sales in this market and still maintain healthy margins.’
The company floated on AIM in January, raising £4.5 million of new cash in an oversubscribed funding, with a further £3.7 million of shares placed by existing shareholders, both at 72p a share.
Strategy
Originally set up in 1994 by Hales’ mother- and father-in-law, the company he now leads has grown into one of the UK’s three largest independent providers of domiciliary care services to the old and infirm.
The group sports a strong footprint in its regions and has over 850 carers on its books making more than 37,500 home visits a week.
A key investment attraction is the earnings visibility as the group has 55 long-term deals with local authorities. These are typically three to seven years in duration.
Tellingly, almost 60 per cent of the group’s 2006 forecasts are covered under what are known as ‘block’ contracts, where the local authority guarantees to buy a minimum number of hours throughout the duration of the deal.
The delivery of cost savings to its customers is another selling point. Claimar actually provides care 24 hours a day, 365 days a year, charging between £9 and £12.50 per hour. ‘For a local authority to fund this level of residential care, it is usually about £300 a week. However, we can deliver home services for £90, so there is a significant saving from us for central and local government.’
Growth is being delivered two ways: through the acquisition of businesses in complementary or strategic locations. And also organically through existing branches, enhancing returns from existing contracts, pursuing new tenders and developing complementary services.
Since late 2003, Claimar has won 17 out of the 22 new local authority tenders it has gone for and has yet to lose a contract to date. Earnings-enhancing acquisitions, like new contracts, can be integrated extremely swiftly, as they effectively comprise simple contracts and a staff pool. Claimar has made a slew of acquisitions since 1999 and made two acquisitions in the early months following the float, the most recent being Cheshire-based care provider Medgal Care and before that Walsall Homecare
in March.
Hales insists there is plenty of infill to play for in Claimar’s Midlands and North West stomping ground. ‘We have looked at thirteen deals since we came to market,’ elaborates Hales, ‘We have completed two and are in discussions with five or six others.’
Management
Investors are backing a highly enthusiastic and motivated management team, led by Birmingham native Hales, 36, who has guided the group’s fortunes since March 1999 and has responsibility for strategy and operations. Hales’ early career was spent in the motor industry, where he ascended to the position of general manager of the Car Supermarket in Cannock, an operation with turnover of £75 million per annum. Before this, he spent time as a consultant with the Spring Group (formerly known as CRT Plc).
Hales’ involvement with Claimar began in 1999, arriving as operational manager and then moving to managing director. His brief at first was to prepare the business for a sale, but after running the rule over Claimar, he was ‘knocked out’ by its potential and promptly told the family ‘we aren’t selling’.
Ably assisting Hales in the finance director’s seat is accountant Tony Guest, 50, another with a motor industry background. Guest joined the company in 2004, having earlier served as finance chief of Autolease Ltd (now the vehicle contract hire division of Lloyds TSB) and latterly at the biggest UK franchise of Budget Rent-A-Car.
In the chairman’s seat sits John Crabtree, a former senior partner at Birmingham corporate law firm Wragge & Co. Crabtree is also non-executive chairman of Midlands small cap engineer Metalrax, SLR Holdings and the Birmingham Hippodrome. He carries out non-executive duties at AIM-listed Staffline, the human resources venture.
Prospects
Sector prospects at this firm are underpinned firstly by simple demographics – the over-65 age bracket is forecast to be the fastest growing segment of the UK population.
Then there are market trends in its favour. Outsourcing of homecare provision by local authorities to the private sector continues to escalate, and the market is witnessing a dramatic dwindling of care hours they provide directly.
Research suggests the domiciliary care market is now worth around £2.5 billion and rising. This equates to almost 17 per cent of total social care spending. By 2028, demand for home care services is expected to be 66 per cent higher than it was
in 2005.
Further assurance on long-term prospects comes in the form of the Government’s white paper and the recently published report on future demand for social care for older people by Sir Derek Wanless, both of which point to more demand for homecare in the future.
On top of all of this is the simple fact that this is a highly fragmented market of around 5,000 registered domiciliary care providers, of which over 70 per cent are small stand-alone businesses, much like Claimar in its embryonic years. Entry barriers continue to grow, with local authorities increasingly looking to outsource work to players with scale in a sector regulated since 2003. ‘We are definitely seeing a tightening of the interpretation of those regulations now,’ admits Hales, who predicts life will keep getting harder for the sector’s smaller fry, who ‘are frequently finding it more difficult to bid for, win and fulfil larger contracts’.
Claimar is making positive trading noises compared to troubled rival Careforce, which has disappointed with a couple of warnings on revelations that local authority referrals have been lower than expected, due to budgetary constraints and a tightening
of eligibility criteria. Claimar recently allayed fears with the news it ‘has not noted any marked impact’ on the level of business referrals from local authorities. ‘We are seeing the reverse,’ adds Hales. ‘We believe demand is strong and eligibility tightening means that the type of person we are taking on has greater needs, which means greater care hours.’ All of this, of course, supports margins and profits.
Claimar has an impressive five-year track record – turnover grew more than 700 per cent between 2000 and 2005. This top-line compound growth rate of 53 per cent was matched by impressive returns, with EBITA increasing from £76,000 to £760,000, an even higher compound growth rate of 59 per cent. Throughout the five years, gross margins have remained stable at 37 per cent.
Valuation
This year, analysts are gunning for a spike in pre-tax profits to £1.4 million on £13.5 million sales, giving 4.4p of earnings, ahead of earnings of 5.7p and profits of £1.8 million the following year. These metrics place the shares, which have fallen back on recent sector weakness, on a forward rating of 17.4, falling to a far more palatable 13.4 next year. This is undemanding.
Given that earnings are projected to grow by 30 per cent between 2006 and 2007, even before likely acquisitions, Claimar’s PEG ratio of 0.58 looks distinctly on the miserly side. Bulls might also argue that the price-to-sales ratio is too low, with the current market price representing barely 1.3 times this year’s forecast revenues.A solid, long-term buy.
| AIM | £5.12m |
10.25p
|
1.00p
|
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