Any investor that wants to gauge the popularity of investing in the care homes sector could do a lot worse than look at a recent fundraising by Target Healthcare. Having identified interesting new assets to buy, the specialist investment trust embarked on a placing to raise an estimated £50 million at the beginning of September under a programme designed to help it to regularly raise new investment money.
Such was the popularity of the offer that after ten days the trust increased its fundraising to above £60 million. When the deal was completed a day later, it had raised £80 million, 60 per cent above its initial target.
Target Healthcare is a real estate investment trust created in 2013 that invests solely in modern, purpose-built care homes that cater to patients predominantly in the private market but also the public sector. Its aim is to provide its shareholders with a solid level of dividend income, supported by the rental payments that it receives, as well as generating capital growth.
It has a stated intent of expanding its portfolio — at present consisting of 63 homes — through acquisitions, so any prospective investor should expect to be regularly asked to dip into their pockets to subscribe to placings to raise additional funds, or risk having their holding diluted.
The investment dynamic of its market has plenty speaking in its favour. An ageing population has been growing more affluent, thus more prepared and able to use the private healthcare insurance system to fund the care needed in old age. At the same time, relatively recent history brings its share of red warning signs about the sector in the form of the demise of two providers: Four Seasons and Southern Cross.
However, Target employs a different business model from the one that brought those two companies down. Where they were backed by private equity and ran up large debt consolidating a highly fragmented market through acquisitions, which they ran themselves, this trust acquires newly built homes and is a long-term property freeholder that lets out to tenant operators on lengthy leases with upward-only rent reviews.
As a provider of beds to public sector patients, Target potentially could be exposed to government cuts, but its emphasis on high-quality, modern properties means that it is unlikely to fall into the trap that awaited its predecessors of running shoddy homes that needed substantial spending on improvements.
In terms of its patients, about 63 per cent are either entirely private or rely on the NHS or local authority for only a proportion of their fees, so the trust doesn’t feel overly reliant on the public sector for its income. Four Seasons and Southern Cross received the majority of their income from the public purse. With net debts of £79.5 million at the end of June and several undrawn borrowing facilities, nor does it feel to be overly geared.
The trust has consistently beaten its benchmark, the MSCI UK Annual Healthcare Property Index, since it was listed, generating an annualised total return of 12 per cent, against 9.3 per cent for the index.
There are other investment trusts that specialise in private healthcare, but this is the only one that simply buys new properties, which feels to be the least risky approach. Its high quality probably explains why its shares, flat at 113½p yesterday, trade at a modest premium of about 5.6 per cent to the net value of its assets. A juicy dividend yield of just under 5.9 per cent makes up for the momentum lacking in the stock, up only 11 per cent in six and a half years. They should be doing more.
ADVICE Buy
WHY Tied in to structural growth in private healthcare and reliable increases in rental income
Computacenter
For a technology company, Computacenter is reassuringly boring. It’s a leader in the unglamorous field of providing businesses, particularly big ones, with the IT system upgrades they need for the digital age or to gain protection from incipient risks such as cyberattacks or data theft.
Shareholders have tended to view it as a reliable best friend, almost guaranteed to lift earnings each year, improve the dividend and supplement it once in a while with a special return made possible by the size of its cashflows.
Computacenter was formed in 1981 as a reseller of computers, listing its shares in 1998. The group has sizeable operations in France and Germany as part of its international activities and, as of this time last year, a growing presence in the United States, which it entered with the $70 million acquisition of Fusion Storm, an IT services company.
As well as selling companies hardware and software systems, Computacenter also operates a consultancy service and generates extensive revenues from maintenance and repair contracts. Its customers include British Gas, Camelot and John Lewis and it is a member of the FTSE 250 midcap index with a market value of just under £1.5 billion and an annual turnover of more than £4.4 billion.
Boring it might be — as well as being on course for its best annual profits growth on record, after upgrading its forecasts in July — but the performance of its businesses is by no means uniform.
Britain has been weak, in part because of higher costs associated with having to pay to retain high-quality technology experts; the German unit has been feeling the effects of the country’s economic downturn; but France has been particularly strong. Computacenter’s American adventure remains in its early stages and, after a weak first few months of the year, it has begun to trade more positively again.
The shares have been under the cosh since the technology-led global sell-off late last year, but are reviving. Down 2p, or 0.2 per cent, at £12.93 yesterday, they trade for a reasonable 16.6 times Stifel’s forecast earnings for a yield of about 2.6 per cent.
ADVICE Hold
WHY Solid long-term performer but parts of the group have been weak
