As many pension trustees know only too well, people are now living longer than ever. With better healthcare and improved diets, life expectancies have gradually risen over the past 25 years, from about 74 in 1980 to around 78 today. Like many people, I have elderly relatives who currently require round-the-clock attention. My grandmother is 98 and, despite her frailty, wishes to continue living at home because she is fiercely protective of her independence. Hence my interest in this company:
Gamble of the week: Careforce Group (Aim, CFG, 96p)
Careforce Group (CFG) was founded in 1999 and provides home care for the elderly and for people with physical or learning disabilities. The company’s services are largely delivered as part of outsourcing agreements with local authorities (which account for 80% of sales), but are also offered on a private basis.
This is a win-win situation for the individual as well as local authorities. The individual benefits by avoiding having to go into a so-called “old people’s home”, which many find does not suit them. And for financially strapped local authorities, home care is a much cheaper option than full-time residential support.
Careforce operates from 27 locations in England and employs 2,500 carers, providing services to around 9,000 homes. Usually, trained carers make daily house visits and their time is charged at around £12 an hour, creating gross margins of 30% to 35%. But about 10% of turnover relates to the provision of full-time care, where a carer lives with the user on a 24 hour, seven days a week basis.
The UK market for homecare services is estimated at £2.6bn.
The sector is highly fragmented; although Careforce is one of the top five providers, it still only possesses around a 1.5% share of the market. This means there is considerable scope for future consolidation, particularly as the cost increases driven by tighter regulation fall more heavily on small providers as a percentage of their profits. Careforce’s main competitors are Nestor Healthcare, Care UK, Allied, Supporta and Claimar.
Over the past seven years the business has grown rapidly – organically and by acquisition – with sales hitting £20m in 2005. In the first half of 2006, like-for-like revenues grew by an impressive 19% and are forecast to hit about £28m for the full year, generating earnings per share of 7.9p.
Encouragingly, on 22 August the board announced that “revenues and profits for the year to July 2006 are expected to be in line with market expectations”. The company is carrying net debt of around £5.3m.
For investors, the main concerns to watch out for are greater competition, problems with integrating acquisitions and the usual difficulties of delays and inefficiency associated with working with the Government.
However, with life expectancies rising, I believe that long-term
demand for Careforce’s homecare services will continue to be strong. At 95p and trading on a current year p/e of 12, the shares are good value. And what’s more, the management team knows it: two Careforce directors recently purchased shares at between 101p and 105p.
Recommendation: BUY at 96p (market cap £13m)