Sun takes a shine to Ashbourne

THE INVESTMENT COLUMN

Investors in nursing home operators have enjoyed a roller-coaster ride since the industry became fashionable in the early part of the decade. They have faced voracious demands for cash to fund rapid expansion programmes, and uncertainty over government funding for the elderly has taken the shine off the price gains achieved in 1993.

The long-term attractions remain sound none the less. Proof of this can be seen in the continuing interest in the UK sector from US groups that have grown fat caring for the elderly in their own market.

Sun Healthcare Group, a large US nursing home group, is now launching an all-out attack on the UK. Yesterday it announced that it had paid £12.1m for a 15 per cent stake in Ashbourne, a spin-off from hotel group Stakis, at last year's 150p flotation price, pushing the shares up 13p to 153p.

Almost simultaneously, Quality Care Homes, the Darlington-based operator, confirmed newspaper reports that it had received conditional takeover proposals at 330p a share from Sun offshoot Exceler Health Care and had also been approached by CrestaCare, a rival operator. Although both offers have been rejected by Duncan Bannatyne, Quality's chairman and 64 per cent shareholder, the shares soared 45p to 275p yesterday.

The news came as Ashbourne released its first results since November's flotation. Pre-tax profits up from £360,000 to £3.12m, boosted principally by interest savings on the £48m raised, held few surprises. A maiden interim divided of 1.1p makes good the flotation forecast.

Gross profit margins, despite higher head-office costs and the price of flotation, were broadly maintained at just over 32 per cent. The only cloud on the horizon stemmed from a fall in the occupancy rate to 86 per cent from 91 per cent as a result of the squeeze on local authority finances.

Sun has agreed not to bid for control of Ashbourne within 12 months, but it is clearly acquisitive. It is less than a year since it took control of the venture capital-backed Exceler, and brokers expect it to raise its stake in Ashbourne to closer to 30 per cent soon. Westminster Health Care, the UK's second-biggest operator, has already undergone rapid growth with the backing of the US National Medical Enterprises, which owns 42 per cent. The support of Sun, valued at more than £400m by the New York Stock Exchange, could do similar things for Ashbourne.

Broker Collins Stewart's forecast of pro forma profits of £7.05m this year would put the shares on a prospective multiple of 14. That looks reasonable value, while investors should not ignore Quality Care, with Mr Bannatyne looking ready to accept a bid at over 400p.