The slowdown in the Australian economy is a real concern because of the sheer quantity of assets Cape has in the region - some £238.7m in the latest annual report, of which £153.9m was goodwill and intangibles; writedowns here would make a serious dent in a balance sheet with net assets of £406m.
The reason for the scale of intangible assets in the region is that Cape went on a buying spree in the heady days of 2007, hoovering up three companies - Concept Hire, PCH and TCC. These assets are now under review after Cape said it had identified "a number of issues" relating to their value. Keith Morris, an analyst at Investec Securities, thinks a reasonable chunk of that goodwill in Australia could be written off. He forecasts adjusted EPS of 22.5p for the current year. However, the impact on reported pre-tax profit numbers will be far more severe.
Earlier in the year, management assured that problems were isolated; they now appear to be legion. The group-wide asset review is sensible, but the size of the problem in Australia is worrying. Add in further delays on the troublesome Arzew project in Algeria and we'd advise investors stay well away. Sell at 191p.
Last IC view: Sell, 187p, 1 August 2012