Southern Cross shares take a big tumble

Jul 1 2008 by Karen Dent, The Journal

HUNDREDS of millions of pounds were wiped off the value of care home giant Southern Cross yesterday when the business issued a profits warning.

At one point, shares in the Darlington-based business – the UK’s biggest care home operator – fell to 55p, reducing the value of the fast-growing business by almost £500m.

Investors were spooked after Southern Cross said it had been unable to fill beds at its 700-plus care homes as quickly as it anticipated. It currently has a 90% occupancy rate, which equates to 33,450 residents.

“Central Government funding to local authorities for social care has come through later than in previous years and the seasonal admissions increase has taken longer to occur,” the group said in a trading update.

“These factors, when combined with higher than normal attrition rates of nursing residents, have resulted in lower than anticipated occupancy levels.”

Due to the sheer scale of Southern Cross’s property portfolio, it said slightly lower occupancy rates meant it was unable to reduce costs and its financial performance for the second half had “fallen behind expectations”.

High costs and low occupancy levels at Active Care, its specialist subsidiary for people with mental health problems and learning disabilities, had also caused problems. Southern Cross has called in a new management team to review that business. The group now expects profits of around £80m for the financial year ending in September, below City expectations, even though it is now entering what is traditionally its busiest quarter of the year.

Investors received further worrying news with the revelation that Southern Cross has been given an extra 28 days to repay a £46m bank loan after failing to sell 20 homes in time to meet its bankers’ deadline.

The statement was rounded off with the news that finance director Jason Lock has left the group with immediate effect to be replaced by Richard Midmer, previously the finance director of property investment group NHP plc.

Chris Glasper, an analyst at Brewin Dolphin in Newcastle, said the market’s initial panic had been an overreaction. Southern Cross shares ended the day at 130p, down 183.