On the up

Founded in 1993, CareTech Holdings runs a number of residential care homes throughout the UK. Its services are aimed at catering for adults and children with care homes catering for differing needs dependent on its clients.

As I write, CareTech shares are trading for 691p per share. This time last year, shares were trading for 428p per share. A share price increase in 12 months of over 60% is impressive in my opinion. In 2021 alone, CareTech shares have increased 31% from 524p per share to current levels.

When identifying my best shares to buy now, I often find most of my picks are on an upward trajectory. I believe this could be the case for CareTech too. So what has contributed to the share price increase?

Recent strong performance

In June, CareTech released an interim report for the six months ending March 2021. The results made for good reading. CareTech said revenues had increased 16.5% to £243m compared to the same period last year. This rise in revenue contributed to a 19.1% rise in underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA) to £49.4m.

In addition to the rise in earnings, CareTech managed to reduce net debt down to £263.1m compared to £268.9m six months prior. It also decided to pay an interim dividend of 4.6p per share which is a 15% increase on the 4p interim dividend paid out last year.

The best shares to buy now carry risks and reward

I have two primary concerns with CareTech’s investment viability. Firstly, rumoured healthcare and social care reforms by the government in the near future could affect CareTech’s operations. What this looks like is very much a mystery just now and that unsettles me as a potential investor.

Next, despite making progress in reducing it, CareTech’s debt level is something that does concern me. With performance seemingly on the up in recent times, this debt could reduce even further and not be an issue. It would be naive of me to ignore it currently, however.

I think CareTech could be a good addition to my portfolio and there is lots to like about the business. In addition to its recent excellent performance, analysts believe that annual profits could rise 8% and 9% in the next two financial years. I do understand forecasts can change, however.

At current levels, CareTech has a price-to-earnings valuation of just over 15 which I consider to be undervalued. Furthermore, CareTech has good defensive attributes. It managed to keep all its homes operational throughout the pandemic and lockdowns. Government figures suggest adult social care demand will continue to rise for the foreseeable future which will benefit CareTech.

Overall I think CareTech could be one of the best shares to buy now. I would happily add shares to my portfolio at current levels.

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Over the past 12 months, the CareTech share price is up 44%. But the AIM-listed company has reversed 1% today, to 603p per share, and away from Wednesday’s 14-year closing high of 610p. I think this mild retracement reflects light bouts of profit-taking rather than investor disappointment at the latest numbers.

Sales and profits power higher

In its interim report, CareTech said that revenues soared 16.5% during the six months to March, to £243m. This helped push underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA) 19.1% higher year-on-year to £49.4m.

The UK healthcare share — which provides residential care for children, young people, and adults with special requirements — said that organic sales rose during the first half. It added that the transfer of adult specialist services sites from The Huntercombe Group, constructive fee negotiations, and the positive impact of Smartbox Assistive Technology also contributed to the year-on-year increase.

CareTech acquired Smartbox, which manufactures software and hardware that allow people with speech problems to communicate, last October.

Dividends hiked

In other news, CareTech saw net debt edge down to £263.1m as of March from £268.9m six months earlier. This helped reduce its net debt to adjusted EBITDA ratio to fall to 2.8 times from 3.1 times at the end of financial 2020.

Finally, CareTech pledged to pay a half-time dividend of 4.6p per share following its strong first-half performance. That marks a 15% improvement from the 4p interim payment shelled out last year.

Executive chair Farouq Sheikh said, “The group’s first half performance has been strong with all operational divisions demonstrating considerable resilience… Covid-19 has highlighted the importance of having community based, high quality social care facilities to relieve the pressures on the NHS”.

He added, “We remain confident of our outlook, delivering further earnings and dividend growth and in the long-term prospects of the business.”

Why I’d buy CareTech shares

City analysts seem to be in agreement that CareTech will keep enjoying solid progress on these fronts, too. Indeed, annual profits are tipped to rise 8% and 9% in financial 2021 and 2022 respectively. This leaves the company trading on a forward price-to-earnings (P/E) ratio of just 13 times. Of course, forecasts can change based on future developments. 

But I think this valuation is far too low given CareTech’s terrific defensive qualities. Its operations remain stable during economic upturns and downturns. And what’s more, it is a market leader in a growing sector. Government forecasts suggest the number of adults requiring social care between 18 and 64 years of age will rise 29% between 2018 and 2038, for example.

Okay, firms with large appetites for M&A like CareTech can take a hit if acquisitions disappoint. This particular UK healthcare share is also vulnerable to potential changes in healthcare investment at the government level. But all things considered I still think this AIM firm is a top stock to buy for my portfolio right now.

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CareTech Holding (LSE: CTH) is a small-cap I think has been way, way oversold. At current prices of 385p per share, the care and education specialist deals on a forward price-to-earnings (P/E) ratio of just 9.5 times. It’s a rating that both undermines its exceptional defensive qualities and its rising revenues opportunities, in my opinion.

The company provides a wide range of essential social care services for children and adults. It thus provides an indispensable service that does not bend to changes in the broader economic landscape. Indeed, recent CareTech comments disclosing that business has remained “resilient” since the end of March underline just what a brilliant investing lifeboat it is during tough times like these.

Don’t think of CareTech as just a wise buy as the global economy shakes, though. The firm remains committed to acquisitions to bolster its longer-term profits outlook. Earlier this year entered it secured a 51% stake in AS Group, a business it describes as “the largest provider of private outpatient mental health services in the United Arab Emirates.” It has plenty of financial firepower to follow through on its packed pipeline of investment opportunities too.

Another crash casualty

Tyman is another small-cap I’d happily stash into my own stocks portfolio following the recent crash. At current prices around 165p per share, it trades on a rock-bottom forward P/E ratio of around 7.5 times. It’s a reading that I don’t think reflects its rock-solid balance sheet or its brilliant long-term profits picture.

The business makes the components for doors and windows that are essential for homebuilding. It stands to struggle in the near term due to the cyclical nature of its operations. But the strength of its market-leading brands all over the globe — it has operations across Europe, The Americas and Asia — should put it in the box seat for a strong recovery when the global economic downturn eases.

A glorious foodie

I’d also be happy to buy sausage skin maker Devro today. This small-cap’s price of 160p per share means that it trades on an earnings multiple of approximately 10 times, based on current forecasts. And it’s a company that’s expected to keep growing earnings over the next couple of years, irrespective of the upcoming macroeconomic slump.

We can’t do without food, obviously. And so those involved in the production of edible goods tend to be more resilient in times like these. But don’t just think that Devro as a top buy for the next few years. The recent investments it has made to boost its product ranges and its global manufacturing base should bolster its profit-making abilities over the longer term too.

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The firm, which bills itself as a “global identity data intelligence specialist,” has seen its shares quadruple in price over five years, though the past 12 months have seen a relative flattening off, albeit a somewhat volatile one.

The company expects total revenue for the period to have risen by an impressive 64% to £93.7m, though that does include new acquisitions in the form of Vix Verify and IDology, with organic revenues said to be up 18%.

Profit rise

The firm expects to report adjusted operating profit of around £20.9m, up 138% on the same period last year, but how do we relate these figures to the share price valuation? In a year of growth through acquisition, I don’t think it’s easy.

Analysts are predicting a largely flat year for earnings per share, which would put the shares on a forward price-to-earnings ratio of approximately 34, or around twice the index average. There are dividends with a low yield of 0.6%, but they are progressive and are expected to have risen by 80% in five years this year.

A major effect of the year’s acquisitions is a lurch from net cash of £18.6m a year ago to net debt of £53.8m. But while that looks high, it would only be around 1.3 times annualised operating profit, so not too much of a worry.

GB probably does have a strong long-term future, but the combination of acquisition-led growth, debt, and a high P/E multiple means I’ll sit this one out and just watch.

Bigger dividend

Meanwhile, over at CareTech Holding (LSE: CTH), we’re seeing more modest growth expectations, but at a significantly lower valuation with shares on a P/E of 11, which would drop to around nine on 2020 forecasts. Dividend yields are higher too, at a little over 3%, and three times covered by earnings.

Thursday’s full-year trading update from the social care and education services provider told us that performance has been in line with market expectations. The year was pretty much dominated by the acquisition of Cambian, focused on the children’s services segment, which has come close to doubling the company’s occupancy capacity.

Net debt is a key figure here too, and at 30 September it stood at £293m, up from £147m a year previously, reflecting in part the cash consideration needed for the Cambian acquisition.

Debt

While the firm has a modest loan to book value of 40% (with a property portfolio valued at around £774m), its expected net debt to proforma EBITDA approaching four times gives me cause for concern. The company does, however, expect that to drop to under three times in the medium term.

How does CareTech look as an investment? I can’t help feeling that the negativity surrounding property at the moment has led to an undervaluation for the shares. If you think the property market has a strong long-term future, which I do, I think CareTech could be a profitable buy.

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Meanwhile, in today’s half-year results report, the directors declared a 7% increase in the interim dividend compared to the equivalent period a year earlier. And a steadily rising dividend is something shareholders are used to with the firm. Over five years it’s up almost 60%, which strikes me as a decent return for income-seeking investors.

A “transformational” acquisition

Today’s share price close to 380p puts the forward-looking dividend yield for the current trading year to September at just over 3%. Given the company’s strong record of growing the annual dividend, I reckon a 3% yield is a decent starting point.

City analysts following the firm anticipate earnings will cover the payment a little over three times. A robust level off cover like that suggests to me the directors anticipate further growth, otherwise they might pay more cash out to shareholders rather than ploughing it back into the business.

The accounts are dominated by the October 2018 acquisition of Cambian Group, which executive chairman Farouq Sheikh describes in the report as being “transformational” for CareTech. The integration of Cambian is “well underway” and the expected synergies from the enlarged operation are “on track.”

You can get a feel for the scale of the expansion from today’s figures. Overall revenue rose 120% compared to the year-ago number, underlying profit before tax shot up 50%, and the firm’s net asset value rose 58% to £328m. Net debt increased by 99% to £293m.

Things can get a bit blurry in the figures whenever a company first takes on a big acquisition. But like-for-like revenue in the original CareTech business went up 12% in the period and like-for-like EBITDA increased 4%. Meanwhile, underlying earnings per share increased by 7%. It seems to me CareTech is still trading well and growing organically.

The firm commissioned an independent valuation of the enlarged company’s property portfolio back in October on the date of the acquisition, which threw up a figure of £774m. I think the property backing with this share is one of its prominent attractions.

Consolidating the sector

The firm sees itself as something of a consolidator in the sector and there’s no sign it will ease off its plans to continue expanding both organically and by acquisition. As long as the firm remains profitable, keeps its borrowings under control and continues to move the dividend up, I think that’s a good thing.

As well as the benefits of an efficient operation for the firm’s care-users, this one could be a decent, cash-generating hold for long-term shareholders. I’m tempted to pick up a few shares to collect that growing dividend while waiting to see how the growth agenda plays out for shareholders.

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CareTech provides specialist support for adults and children who have a “wide range of complex needs.” The company has more than 200 properties in the portfolio, which provides a big chunk of the net asset value on the firm’s strong-looking balance sheet.  

Good figures

Given the rise in the dividend, today’s figures are predictably good. Revenue rose almost 12% compared to the previous year, underlying pre-tax profit also lifted nearly 12%, cash from operations increased by nearly 40%, and underlying earnings per share eased back almost 7.8%. The figures have been affected by the firm’s October takeover of Cambrian Group, a provider of specialist behavioural health services for children in the UK, which will have increased revenues along with the share count because of the additional shares issued as part of the deal.

Despite the big changes in operations during the year, CareTech reported net debt unchanged year-on-year at £147m, which is put into perspective by an independent property re-valuation that puts the worth of the firm’s property estate at £424m.

As a property-backed potential investment, I think CareTech has a lot going for it because it also operates a cash-generating care business with a consistent track record of delivering good financial results.

Executive chairman Farouq Sheikh explained in the report that over the 25 years of its existence, CareTech has grown from a focus on adults with learning disabilities towards also looking after young people and children with complex needs “across a range of settings.” He said the firm focuses on “the most complex and vulnerable young people” for which there is a market of more than £10bn in the UK. He reckons there is an undersupply of specialist beds in the niche sector with the market growing at nearly 3% per year, which I think bodes well for the future growth of the company. 

An impressive ongoing growth story

The growth story is impressive. Since joining the FTSE AIM market around 13 years ago, capacity has increased “six-fold” and diluted earnings per share have shot up by more than 750%. Looking forward, Sheikh said the firm has “major” plans to invest in 2019 and beyond, with “key new organic developments and bolt-on acquisitions.” The firm also has plans to explore opportunities abroad and is targeting ongoing “double-digit” growth in underlying earnings per share.

Today’s share price close to 348p values the company at a forward earnings multiple of just over 9.6 for the trading year to September 2019. The projected dividend yield is almost 3%. That payment should be covered almost three-and-a-half times by expected earnings, suggesting the directors see plenty of room for further growth, otherwise they would probably return more of the firm’s cash to investors rather than reinvesting into the business. I think the valuation is attractive and CareTech is well worth your further research now. I’d aim to hold this firm’s shares for the next 10 years, or so.

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One such company is alcoholic beverages business Diageo (LSE: DGE). Its share price has declined by 7% in the last three months, which suggests it may now offer better value for money. Alongside another stock, which reported robust performance on Friday, it could be worth buying for the long term.

Robust performance

The company in question is specialist social care provider CareTech (LSE: CTH). It released a full-year trading update that showed it has performed in line with expectations. Net capacity in residential and supported living increased from 2,534 places a year ago, to 2,622 places. Occupancy levels have remained at 93%, while staff turnover has remained below the industry average, at 22%. The company’s care ratings have risen during the year, while annual fee negotiations with local authorities have also led to positive outcomes.

Looking ahead, the recent acquisition of Cambrian could act as a catalyst on the company’s performance. It seems to be a highly-complementary business which could help to support CareTech’s strategic goals.

With the company trading on a price-to-earnings (P/E) ratio of around 11, it could offer good value for money at the present time. Given its near-50% rise in dividends per share in the last five years, it could also have income growth potential – especially since its dividend yield of 2.7% is due to be covered 3.5 times by profit in the current year.

Growth potential

The growth prospects of Diageo continue to be relatively robust. Certainly, fears surrounding the wider global growth outlook are a concern for the business. Rising US interest rates and the prospect of further tariffs could lead to further share price weakness in the near term. However, with the company enjoying a high degree of customer loyalty, and alcoholic beverages having relatively stable demand in a variety of economic conditions, the long-term outlook for the business seems to be positive.

Diageo is focusing on improving its efficiency, and this is expected to contribute to a rise in earnings of 7% in the current financial year. Although it has a P/E ratio of around 21, the company’s rating could move higher over the coming years. Its mix of growth potential from emerging markets, and its established position in more mature markets, could provide an enticing risk/reward ratio over the long run.

As such, and while further share price falls cannot be ruled out, the investment potential of the stock seems to be high. It appears to have defensive growth prospects that could help it to outperform the FTSE 100 over the long run.

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I like the way CareTech Holdings (LSE: CTH) has raised its dividend over the last few years and I’m reassured by the property-backed balance sheet. Today’s full-year results from the UK-focused specialist social care services provider reveal net tangible assets of around £120m, which compares to a market capitalisation of £321m. Meanwhile, the overall property portfolio has a valuation of £329m.

An agenda for growth

On top of these basic value credentials, CareTech raised £37.4m in March to accelerate its programme of growth by funding the acquisition pipeline and organic growth projects. I think that’s a good idea because trading is steady and the company operates in a sector with constant demand. The firm has a good record of robust incoming cash flow that supports profits well. Doing more of the same could enhance the value for those holding the shares. Back in March, the directors promised to put the extra placing funds to work within one year, so I’m optimistic about the immediate outlook now.

Chief executive Farouq Sheikh tells us that some of the funds have already been used to acquire Selbourne Care during June and to move organic initiatives forward including property purchases and reconfigurations. But there’s more to come. The top executive said: “We enter the current financial year with strong underlying cash flow, solid organic growth and a sizeable pipeline of opportunities, which together give us confidence in continuing to deliver our exciting growth strategy.”

Good numbers

Today’s numbers suggest that the pot is boiling nicely. Revenue lifted more than 11% compared to a year ago, underlying profit before tax put on almost 13% and underlying basic earnings per share came in flat, which isn’t bad considering the dilution caused by the share placing. Pleasingly, the firm’s net asset value rose almost 35% during the year and the directors crowned all these financial achievements with a 7% hike in the full-year dividend.

CareTech strikes me as a solid, growing firm operating in a defensive sector, and I’d much rather take my chances with the shares than I would with a stock that I see as being in long-term decline such as Tesco (LSE: TSCO). These days, I think of Tesco as a dinosaur struggling to survive in a changing world. The firm was caught out clinging to an out-of-date business model that just won’t work to keep the firm at the top of the pile any more.

The imminent takeover of Booker Group shows that Tesco is adapting and changing to counter the onslaught form fast-rising discounters such as Aldi, Lidl and others. Earnings resurged from their nadir this year, and City analysts expect more progress next year. I wouldn’t expect the firm to collapse without a fight. However, I think the tide is still against Tesco and the most likely long-term outcome is a prolonged period of managed decline rather than a new epoch of growth.

Why I think the price is wrong

That’s why, at the current 204p share price, I’m concerned about the forward price-to-earnings ratio running at almost 16 for the year to February 2019 – I see it as too high. Dividends are being reinstated this year but at a shadow of their previous level, and I just don’t think Tesco deserves such a growth-like valuation, so I’m shunning the stock.

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The unloved shares now trade on a lowly forward P/E of 10.5 and offer a 7% yield. Could now be the time to buy? 

I’d say not, given the pressure on the core business. According to CEO Ian Conn, there are now 25 energy suppliers in the UK and 15 switching websites. It is easier than ever for customers to hunt for better deals and there are more companies competing on price than ever before. 

As a result, total customer account holdings in the UK fell 2% in the first-half of this year. That’s not a huge decline by any stretch, but I’m averse to investing in a declining business just for yield and I don’t see competition calming down any time soon. 

Further to this, the company has switched strategies a number of times in recent years. Its most recent flip-flop is the swing from heavily investing in, to downsizing, its oil exploration and production business after the oil price crash a few years ago. 

The resulting asset sale has admittedly strengthened the balance sheet, knocking 22% off of net debt, which now stands at a still sizeable £2.9bn, but surely long-term shareholders will be frustrated with the mismanaged venture. 

The threat of political intervention still hangs over the shares too. Theresa May reiterated her intention to cap energy prices at the Conservative party conference earlier this month and that has the potential to be bad news for Centrica. 

I prioritise a stable strategy and steer clear of potential political intervention when selecting dividend payers, so I wont be adding Centrica to my portfolio in the near future.

Volatile value stock

CareTech Holdings (LSE: CTH) is another value stock I’ll be steering clear of. It provides specialist social care including people with various learning disabilities, eating disorders and behavioural issues. A noble cause to be sure, but one that might not generate excellent shareholder returns in the long run.

The company negotiates its fees with local authorities on a yearly basis. The inability to set their own prices increases the chance that costs might outgrow revenues and I fear the highly politicised nature of healthcare services could lead to their exceptional profit margins being crimped deliberately in the future. 

Perhaps I’m too bearish on the stock. The specialist nature of the care provided helped the company achieve a near-20% operating margin in the first half of this year and perhaps means there are fewer competitors. The company also reported a good set of results today, including 93% occupancy levels in the mature estate and a net increase of 215 places available.

Perhaps the forward P/E of 12 shows the market is uncomfortable with the company’s significant net debt levels, which fell slightly to £147.2m over the period. 

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And as it continues to develop its product offering, manufacturing new devices as well as expanding into new markets, I believe that it could produce enormous returns for investors. 

Gearing up for growth 

The company, which is focused on early cancer detection, is on track to begin shipping its leading product, the EarlyCDT-Lung kit in the next few weeks. Management has already signed distribution agreements with several countries for this equipment. Minimum payment guarantees of £6.1m from its Asian partners and £1.4m from European partners over the next four to five years have been confirmed. 

As well as its early detection kit for lung cancer, the firm is working towards receiving approvals for its EarlyCDT-Liver test and EarlyCDT-Ovarian test. Further progress on these two initiatives should be announced next year. 

Huge rewards 

The fiscal year ended 31 May was a transformational one for the company. Even though revenue generated was only £0.22m, the approval of the EarlyCDT-Lung kit received in May 2017 means that management can now begin to focus on sales growth. 

To help fund this expansion, the company raised £5m via a placing at the end of September. According to CEO Geoffrey Hamilton-Fairley: “With a strong team in place, a fundraising completed and our R&D progressing well the board is increasingly confident that the Company is well placed to execute that plan and deliver value in the medium and long term.” 

As of yet, there no City analyst has come up with growth projections for Oncimmune, but if the company’s products do what they say, the potential could be enormous. 

Five-year survival for lung cancer, the most prominent cancer killer, averages around 17% for all stages, but for patients diagnosed early, the five-year survival rate is as high as 90%. So the benefits (both financial and ethical) on offer if the company succeeds should be tremendous. 

Bouncing back

CareTech Holdings (LSE: CTH) is another health sector growth champion that I believe has the potential to produce huge returns for investors. It is a provider of social care services. Unfortunately, the company has recently sailed into stormy waters and earnings per share are expected to have fallen by 11% for the fiscal year ended 30 September. Excluding this blip, earnings per share had grown by 39% in four years. 

Going forward, it looks as if CareTech is going to get back on track. Analysts have pencilled in earnings per share growth of 7% for 2018, and pre-tax profit is on track to hit an all-time high. 

To help drive growth, during June management agreed to acquire the entire issued share capital of Selborne Care for a total consideration of £16.9m in cash. It is believed that this deal will be immediately earnings enhancing, growing both the top and bottom lines of the combined group and management is looking for further deals to bolt-on growth. 

As the shares currently trade at a forward P/E of 11.4 and yield 2.5%, I believe that investors can buy into this growth story at an attractive valuation. 

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