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Liberum initiates CareTech at ‘buy’; says shares are “far too cheap”

Analysts said the acquisition of Cambian would quadruple the size of CareTech’s Children’s business and add more than 20% to its mid-term EPS

social care
CareTech is poised to benefit from the 3-4% annual growth in the UK’s £16bn social services market

Analysts at City broker Liberum have initiated coverage of CareTech Holdings PLC (LON:CTH) at ‘Buy’, saying shares are “far too cheap” following the upcoming completion of its acquisition of children’s services group Cambian, which is expected to quadruple the scale of its Children’s business.

The broker said the AIM 100 social care provider was “one of the most experienced” in the sector, reporting above average regulatory scores and occupancy rates with margins two-times that of its peers.

READ: Cambian agrees to be taken over by CareTech for up to £372mln

With the UK’s social services market worth £16bn and growing at 3-4% annually, analysts said that continuing its current strategy would give the firm’s organic earnings per share (EPS) a compound annual growth rate (CAGR) of 6% for the 2018-2022 financial years.

However, it is the acquisition of Cambian that the analysts viewed as “strategically game-changing”, as it would quadruple the size of CareTech’s Children’s business and add more than 20% to its mid-term EPS.

Cambian agreed to a takeover deal by CareTech in August for an offer of 0.27 new shares and 100p in cash per share, or an all-cash offer of 190p per share, which CareTech executive chairman Farouq Sheikh said at the time was a “transformational step” for the firm.

Liberum also initiated the group with a target price of 525p, although it added that post-Cambian deal this valuation would rise to 546p per share.

In mid-morning trading Monday, CareTech shares were up 1.8% at 382p, a 37% discount to Liberum’s target price.

Quick facts: CareTech Holdings

Price: 387 GBX

AIM:CTH
Market: AIM
Market Cap: £434.11 m
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