The Investment Column: Healthy policy at Care UK

Care UK is a rarity in the nursing home sector. While traditional operators have built large nursing homes and hoped local authorities stump up the funds to fill beds, Care UK has focused instead on winning fixed- term contracts from health authorities. Avoiding the local authority market has been smart. As local authority funds have dried up, conventional nursing homes have taken longer to fill, squeezing profits and forcing some operators out of the sector.

Care UK has bucked the trend. Underlying pre-tax profits for the six months to March rose 16 per cent to pounds 1.9m on pounds 12.4m sales, up 26 per cent. Earnings and dividends per share rose 21 per cent.

The emphasis on fixed term contracts in Care UK's business means its all-important occupancy levels are way above the sector - the group does not typically build a home until it has a contract to fill it. And with around four fifths of its 1,000-odd beds contracted and a third under contract until 2006, revenues look secure. Care UK's close relationship with health authorities is crucial too - its contract win rate is good and it is picking up unusual business - like a private finance initiative deal to run a cottage hospital in partnership with Stonehaven NHS Trust. With only a handful of the UK's 132 health authorities tendering there is plenty to go for.

Care UK is also addressing the one weakness of contract work - the patchiness of income. Richard Clough, chief executive, is planning acquisitions in specialist markets this year - learning disability, challenging behaviour and psychiatric care - which should smooth earnings growth. The group is not looking at bids for quoted companies, but with gearing of just 19 per cent and pounds 20m of bank borrowing facilities, it has muscle to snap up a number of private operators. Broker Collins Stewart forecasts 1997 profits of pounds 4.15m. With the shares unchanged at 118p yesterday, they trade on a rating of 15 times this year's earnings. That is fair and the group is starting to look good value on 11 times next year.