The Investment Column: Care UK will be a long-term winner as private sector moves into the NHS

Edited by Stephen Foley

The increasing involvement of the private sector is the totem of New Labour's approach to the National Health Service, and that means an unremitting stream of business opportunities for Care UK.

The increasing involvement of the private sector is the totem of New Labour's approach to the National Health Service, and that means an unremitting stream of business opportunities for Care UK.

And things are proceeding at a fair clip. Care UK's new clinical care joint venture opened its first treatment centre (for some reason they are not being called hospitals) in Plymouth this month and its second follows in Chesterfield in July. It is under contract to provide a minimum number of operations for NHS patients, at a fixed fee per procedure.

Over the next five years, the number of NHS operations conducted by the private sector will double from 5 per cent at the moment. Care UK is on course to take a 15 per cent slug of the first wave of business, and a contract announced yesterday - for a new centre in north-east London - bodes well for its performance in the second wave, too.

At the moment, all this bidding and building work is pushing up costs at Care UK. Debt, up £15.3m to £87.1m, is higher than forecast but since the assets it is building will be so valuable, it has an overdraft facility of up to £125m and private equity-backed players in this sector routinely shoulder even more debt.

The historic core of Care UK's business is its nursing homes, where there were also new contracts to boast of yesterday. A likely shake-up of the funding structures for private sector homes, foreshadowed last week by an Office of Fair Trading investigation, ought not affect Care UK since it operates on the basis of long contracts with local authorities. In any case, the company has sought higher-margin business beyond nursing homes. It is the only operator to offer local authorities a package combining residential care and home help. It is also moving into specialisms such as foster care and homes for youngsters with eating disorders, where the private sector is less well-established.

Care UK is so well-positioned to take advantage of the opening up of health services to private sector providers that we made it one of The Independent's tips for 2005, and its broker, Investec, was yesterday emboldened to predict the shares could hit 500p within a year. Although it is valued at 22 times this year's predicted earnings, that high multiple falls sharply as the benefits of the treatment centre business feeds through next year and from 2007. Long-term buy.