Scapa is in the middle of a turnaround. Now back in profit after a bruising recession, the tape and adhesives business has an ambitious new boss and bags more potential for self-help, making this a recovery that should stick.
- Operating profits up significantly
- Scope for wider profit margins
- Net cash is one-third of market cap
- Rating does not reflect potential
- No dividend imminent
- Legacy issues from former subsidiary
Scapa built its presence in tapes and adhesives with a decade-long buying spree, but the credit crunch and subsequent slump in the construction and motor industries overshadowed much of chief executive Calvin O'Connor's good work. Heejae Chae had trodden a similar path at power cords supplier Volex, even winning a 'turnaround award' in 2007. So, when Mr O'Connor left Scapa in 2009, Mr Chae looked like a sensible replacement. And so it has proved.
This year, the company posted its first profit since 2007-08, driven largely by the higher-margin medical business in Europe and North America. Sales of skin-friendly silicon gels and surgical tapes grew 29 per cent to £33.8m. True, the industrial business still contributes most to sales – about two-thirds in 2011 – but that will change if Mr Chae gets his way. An even split between medical, industrial and electronics – currently just 7 per cent of revenue – is his aim. Relationships with medical supply firms in the UK are already well established, and a new factory in South Korea puts Scapa close to existing electronics customers LG and Samsung, whose sales of smartphones and tablet devices, which use ultra-thin films and adhesives, look well insulated from the economic turmoil.
Progress in electronics should quickly boost profit margins, and a medium-term target of 8-10 per cent looks feasible. Price hikes and cost-cutting aided an increase to 4.2 per cent in 2010-11. And further progress has been made in 2011-12 – a “significant” increase in operating profit for the six months to 30 September will be confirmed at the end of the month.
SCAPA (SCPA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 48p | MARKET VALUE: | £69.7m | |
| TOUCH: | 47-48p | 12-MONTH HIGH/LOW: | 62p | 25p |
| DIVIDEND YIELD: | nil | PE RATIO: | 13 | |
| NET ASSET VALUE: | 47p | NET CASH: | £18.8m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 170 | 7.4 | 3.1 | 0.75 |
| 2009 | 174 | -9.3 | 7.5 | nil |
| 2010 | 177 | -5.2 | -1.9 | nil |
| 2011 | 192 | 6.1 | 2.4 | nil |
| 2012* | 206 | 7.8 | 3.5 | nil |
| % change | +7 | +8 | – | – |
Normal market size: 10,000 Market makers: 6 Beta: 0.5 *Brewin Dolphin forecasts (earnings not comparable with historic figures) | ||||
What's more, a programme of cost-cutting has a long way to run. Mr Chae reckons the turnaround won't be complete for another 18-24 months. And there is plenty of low-hanging cost to be cut. Rationalising the supply chain – Scapa had 14,000 different suppliers at one point – is high on the to-do list. Finance director Paul Edwards thinks "somewhere nearer 500 is about right".
All this is underpinned by strong cash generation. Net cash, up to £20.8m since March, is almost a third of the company's market capitalisation, but don't expect a dividend soon. "We'll enjoy it for a bit," says Mr Chae.
True, there are legacy issues from its days as a paper maker. A pension deficit of £35m is one. And the threat of asbestos-related claims from former US paper mill workers is receding and adequately covered by insurers.
