The Investment Column: Growing pains at Cavendish Cavendish

The pounds 21.5m bid by Court Cavendish for rival nursing home group Greenacre in April looks to have started something of a consolidation phase in the sector. That deal, now unconditional, catapulted Court Cavendish into third place among UK operators and strengthened its position in the South of England. Given the continuing squeeze on the private industry's finances and signs of saturation in the market, the bigger players must increasingly look towards acquisition if they want to continue to grow.

The problem was reflected in yesterday's results from Court Cavendish. Reported pre-tax profits slipped from pounds 5.08m to pounds 4.62m. Stripping out the one-off effects of the move to depreciate property this year (at a cost of pounds 732,000) and exceptional gains last time, there was underlying growth of 13 per cent. But all the increase came from the 387 extra beds the group has either built or acquired in the past two years. Operating margins were broadly unchanged at just under 21 per cent.

The pincer movement on margins is illustrated by the fact that while overall fees rose 2.2 per cent, wage costs advanced 2.5 per cent. The pressure is unlikely to ease, given the shortage of nursing staff and the well publicised problems of local authority funding for the elderly.

Those difficulties contributed to a fall in occupancy to 91 per cent from 92.7 per cent, but Court Cavendish's accelerating expansion programme is also proving a drag on the figures. As well as hitting occupancy, interest charges soared as capital expenditure jumped from pounds 10m to pounds 18.4m. Even after yesterday's pounds 6.7m sale and leaseback deal with Abbey Life on two of its homes, the addition of Greenacre will raise gearing from a year- end figure of 35 per cent to around 60 per cent.

Earnings growth this year will be held back by a further 280 bed development programme and a sharply rising tax charge. Profits of pounds 6.1m would feed through to a forward price-earnings ratio of 12, with the shares up 2p at 219p. Fairly rated.

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