The Investment Column : Community feels squeeze

The continuing squeeze on nursing home budgets felled another victim yesterday when Community Hospitals said it was pulling out of the business.

The decision to put its operation up for sale means Community has finally admitted that its policy of combining hospitals with nursing homes has not been a success. The nursing home side has run through four directors in as many years and the hospitals side has outperformed of late, a trend continued in the latest results.

Pre-tax profits up 28 per cent at pounds 4.95m for the six months to December saw all the growth in hospitals, which saw their trading results rise from pounds 5.08m to pounds 6.2m. The continuing care division, which as well as nursing homes includes the home nursing business, also for sale, was flat at pounds 1.34m.

Negotiations with potential buyers for continuing care are said to be "at an early stage", but analysts are optimistic that the group will be able to realise net asset value of around pounds 30m. The homes, which range from Bingley, West Yorkshire, in the north to London's Finchley in the south and out east as far as Chelmsford, should prove attractive to an industry increasingly aware of the need for consolidation rather than organic expansion. Like many others, occupancy at a lowly 76.4 per cent has been hit by recently opened homes.

Assuming it can raise a decent sum for the operation, the strategy looks sensible, if perhaps a little belated. Increased throughput and an increased attention to cost control instituted by Alan Pilgrim, who took the chief executive's reins a year ago, helped raise the operating margin from hospitals from 19.2 per cent to 21.5 per cent. The group's 10 hospitals situated in an arc around London stretching from Surrey through Hertfordshire to Essex, with outlying ones in the West Country and Yorkshire, benefit from strong local franchises.

That should put Community in a strong position vis-a-vis its insurance company paymasters, which provide 80 per cent of revenues, and should protect it from any attempt by insurers to cut rates as they build networks of "preferred providers" for their healthcare services.

The company's "best view" of full-year profits of around pounds 12.75m puts the shares, up 9p at 382.5p, on a forward p/e of 15. Worth holding as one of the few ways into the private hospital market.