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22 February 2019, Sweden | Mutual Funds | News

Insights from a fund manager: Market-listed care companies – Focus on growth

A large exposure, and a long-term holding that we have highlighted before, is care company Ambea. Since the company has just completed its acquisition of Aleris and reported for 2018 alongside its sector colleagues Humana and Attendo, it feels natural to look forward to 2019 and the coming 2020s.

The attraction of the care sector lies primarily in the high visibility of its growth, brought about by demographic change. These companies are looking to meet the increasing need for health and social care by designing homes under their own management, with greater control over their own operations enabling both better quality for users and higher long-term profitability. Demand is expected to increase significantly, both under the Swedish Act Concerning Support and Service for Persons with Certain Functional Impairments (LSS) and for Individuals & Family (I&F), as well as, particularly, care for the elderly. Statistics Sweden predicts a 70 percent rise in Sweden's population aged 83-86 in the coming decade.

Perhaps surprisingly, one factor that we do not place much importance on is the political risk for the sector. As outlined above, the demographic challenges are huge, both in financial terms and in practical terms for the planning and expansion of housing, as well as in the supply of skills. Private providers therefore help to solve a difficult equation with more efficient utilisation of our shared resources, while at the same time achieving higher measured satisfaction among both users and employees. For that very reason, there are probably many in the social democratic and union movements, and in left-wing local authorities, breathing a sigh of relief that the Reepalu commission proposals have been buried without a more damaging impact on the industry – there is a high level of awareness that private initiatives are necessary.

Efforts to improve quality will of course remain under discussion and review, and our understanding from dialogues with the providers is that this is absolutely central to their work. Sound processes and centralised quality systems are important elements in the work of maintaining and improving satisfaction in their operations. However, the difference between good and poor homes is often determined by the individual leadership – a challenge that grows bigger by the day. Most decisions that affect the sector, apart from personal assistance, are decentralised at the municipal level and it is therefore gratifying that, after the autumn elections, 225 of the country's 290 municipalities have political majorities with a positive attitude towards welfare enterprise – from only 140 municipalities in the past.

For us, Ambea is the most attractive exposure in the sector due to its strong Swedish market position in LSS and its pipeline of projects in care for the elderly, reaching until 2022. With the acquisition of Aleris, it significantly strengthens its Swedish expansion while multiplying its Norwegian sales several times over and establishing Denmark as a new geography – in both cases as the market leader. The complementary nature and overlap of Aleris and Ambea will enable both underlying efficiency improvement and pure synergies.

Ambea ended 2018 with growth in its own managed operations of 11 percent in the fourth quarter and with increased profitability for the group, hitting an operating margin of 8.4 percent for the full year. Two exciting journeys begin here: a growth journey with organic expansion of its own homes and an integration journey with Aleris.

In its own managed operations, which account for just over 70 percent of total sales (even more of profits), it will jointly be able to increase the number of beds in operation by over 40 percent in the next 36 months through projects that have already been granted building permits or are under construction. This pipeline of projects gives very high forecast certainty for the growth in Ambea relative to that found in other parts of the stock market. The growth that can be modelled until 2022 can reasonably be extrapolated some good way into the future, given the demographic conditions and the openings taking place at the municipal level in terms of freedom of choice in care.

As far as profitability is concerned, Aleris is starting at a modest operating margin of 4 percent, which is less than half of what Ambea achieved in 2018. It is worth noting that Ambea has maintained a long-term margin target of 9.5 percent despite consolidating lower profitability through Aleris. Simply put, one-third of Aleris is comprised of businesses with structurally lower margins − probably low single-digit levels. However, the remainder of Aleris has the prospect of achieving margins well in line with Ambea through coordination and further expansion of operations under its own management − primarily in care for the elderly.

In order to capture the integration of Aleris and the expansion of homes that are already planned, we are looking to 2021 as the benchmark for our forecasts. At this time, it will not be unreasonable for the company to be back to the margins that Ambea has today, that is to say around 8.5 percent. With the forthcoming new share issue in mind, this leads to an EPS forecast in round figures of about SEK 10 for Ambea in 2021. Given the growth prospects that exist by 2021, the share should then be assigned a growth valuation in the range 15-20 times annual earnings, giving a target for the share in the range SEK 150-200. Although it is difficult to say what valuation the market is prepared to give, realistically, today's price of SEK 85 is low with earnings of SEK 10 per share.

In addition to the holding in Ambea, we have also established a position in sector colleague Humana over the past year at attractive levels below SEK 50 per share. Humana can be said to have a slightly reversed exposure to Ambea in the sense that it has had few, if any, of its own homes in care for the elderly, and in I&F it has been small in the attractive LSS segment that is dominated by Ambea. Furthermore, Humana is the market leader in personal assistance − a business that has seen some turbulence and where Ambea has no presence at all. Perhaps the only similarity is that both companies have had similar exposure to the Norwegian market.

Humana has been on the stock exchange for a year longer than Ambea (since March 2016), and the share had a dull trajectory until the last six months. This has to a large extent been linked to developments in personal assistance, with the government restricting volumes through the Swedish Social Insurance Agency and, in particular, squeezing the already-modest profitability by granting increases in hourly payments that fall below wage inflation in collective agreements. In addition, it has unfortunately been impacted by simultaneous problems in all three other areas of operation (I&F, Other Nordics and Elderly Care). Thanks to hard work and somewhat more favourable conditions, it has managed to turn the trend in all segments since the second quarter of 2018 and the future now looks bright for Humana.

Personal assistance is growing, and small acquisitions can be made at low multiples. I&F has stabilised within the children and adolescents segment, and has great growth opportunities within LSS, where it is a minor provider. It was already growing rapidly in the Other Nordics segment before the interesting acquisition of Coronaria Hoiva in Finland, and it is finally accelerating the growth in elderly care under its own operations.

Overall, we believe that Humana has an earnings capacity of around SEK 7 per share for 2021, which can be compared to the SEK 67 at which the share is trading today.

What are the risks for the sector? We have talked about political risks and the importance of determined quality efforts on the operational side. When it comes to the financial risk analysis, Attendo focused in its report on the risk of expansion of its own managed operations depressing profitability for longer than expected. The stock market was particularly surprised that the company sees limited opportunity to increase its margin in 2020.

Compared to the small number of inaugurations made by Ambea and Humana, Attendo opened 76 homes in 2018, primarily in Finland where more players are expanding at a high rate and where we see challenges for the market to absorb the entire capacity expansion taking place over a short period of time.

Ambea and Humana maintain their view that homes can, in almost all cases, be filled within twelve months of opening and that good profitability can be achieved. 2019 will be an exciting year of growth and acquisition integration, and we see great opportunities for the sector to provide good returns in the coming years, led by Ambea and Humana!


Martin Jonsson

Fund manager
Direct: +46 8 614 25 59

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