Shares digital

Care home operator Care UK has been upgraded from ‘neutral’ to ‘buy’ by UBS analyst Isabel Green. The upgrade came after the Department of Health approved three of Care UK’s four independent sector treatment centre (ISTC) contracts to proceed to financial close.

‘Although financial close has not yet been signed, our confidence in the likelihood of this happening in the near future has increased, and we move our rating to a buy,’ says Green.

The broker’s estimates and price target of 500p have been left unchanged, however, ‘to reflect these contracts while they remain unsigned, as we still feel there is a risk (albeit reduced) of cancellation’.

Meanwhile, Green believes the fourth contract, Essex, which has been transferred to local procurement, remains highly uncertain. But if the three approved contracts proceed as planned, Green estimates Care UK ‘could expect peak run rate revenue of circa £30m-£40 million a year on an operating margin of 9%-10%’. A further £20 million-£25 million a year of revenue at peak run rate is expected if the Essex contract does reach financial close.

The shares of Care UK have started to tick back up this year following a decline last September after the DoH conducted a review on a number of projects within its second wave of procurement for ISTCs, delaying the financial close of these projects. The shares took a further hit in November after the group announced that the DoH had requested a voluntary termination of the West Midlands Diagnostics contract awarded to Mercury Health in December 2006 due to changes in capacity requirements across this region. However, this latest news implies that Care UK is back on track, and interim results due next month should help to reassure investors further.