The Investment Column: Costly sweetener from Care First

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The Independent Online
Care First's decision yesterday to shell out pounds 7m buying back its own shares looks more about sweetening disheartened shareholders than sensible financial engineering. Not surprisingly Keith Bradshaw, chairman of the nursing home company, is desperate to please after his unwillingness to cede power drove out Chai Patel, his new and well-regarded chief executive.

The buy-back of 4 per cent of its shares at 102p did nudge Care First's value 1p higher to 99p, but that hardly compensates for 75 per cent underperformance in the stock over five years.

Though the tough nursing home sector is partly to blame, Mr Bradshaw and his fellow directors have made some appalling business decisions which have destroyed shareholder value. Until just a year ago, the group's policy was to build single-storey nursing homes on huge sites. That massively pushed up land costs just when falling occupancy was depressing profits.

And Care First's insistence on building basic rooms without en-suite toilets encouraged sniffy purchasers to shop elsewhere. So although turnover has more than quadrupled in five years, earnings per share and fees per bed have actually fallen, even after merging with the more profitable operators, Greenacre and Court Cavendish, Mr Patel's company bought last year.

All the buy-back does is raise gearing higher - to over 100 per cent on some estimates - and strain already thin interest cover. True, Care First's recent decision (better late than never) to stop building new homes will boost cash and profits short term. But for real growth, this company needs new management to take it into fresh, higher margin areas like home care and psychiatry. Just, in fact, what Mr Patel was starting to do.

Until it resolves these problems, Care First's shares look dead in the water, particularly given the likelihood that the group's assets are overvalued. Though its assets are on the books at 140p a share, falling fees per bed and some pounds 30m needed to spruce up its homes make 65p-70p a share a more realistic level. On 13 times this year's earnings, avoid.