Why Scapa shares just plummeted 37%

by Graeme Evans from interactive investor |

A solid recovery unwound in spectacular fashion today, but is this extreme reaction an opportunity?

A profit warning at former AIM ten-bagger Scapa (LSE:SCPA) opened up old wounds for investors today, even if some in the City think that the resulting 30% share price slide is overdone.

The adhesives specialist tumbled to below 200p for the first time since August, having revealed that trading profits for the year to March 31 will be significantly below consensus at around £28 million. It blamed slower-than-expected progress in reducing costs in its healthcare division, as well as adverse trading conditions affecting its industrials business.

Joint house broker Berenberg reduced its profit expectations by 22% and its target price from 272p to 250p. However, it said it was confident that the cause of the downgrade was more to do with timing issues:

“While volatility will persist for a period of time, over the longer term our thesis on Scapa has not changed.”

Source: TradingView Past performance is not a guide to future performance

Berenberg highlighted the company's pipeline of healthcare opportunities, the largest of which the broker thinks could move the “needle on a multi-year view”. This optimism was supported by today's trading update, in which healthcare revenues were still higher than expected at £139 million as the division continues to recover from the blow of last year's ConvaTec contract loss.

Scapa's healthcare business works with some of the world's leading “MedTech” companies to develop and manufacture advanced wound care and other adhesives-based products. Its industrial work includes tapes, films and foams for the automotive and construction sectors.

Manchester-based Scapa, which was founded in 1927, was one of the star performers of AIM for many years as expansion through acquisition helped shares to eventually peak at more than 500p in the summer of 2017. A difficult 2019 followed, however, with the ConvaTec termination and then a 20% slide for shares after CEO Heejae Chae announced his departure after 10 years.

Chae subsequently reversed his decision to leave, allowing the company to focus on managing the impact of the ConvaTec loss on revenues and trading profit in this financial year. It has also been grappling with tough conditions in the industrials division, with margins particularly impacted in the automotive and specialty products markets.

Despite this, shares rallied over recent months to reach 293p a month ago. Joint broker Numis Securities said today's 30% about-turn for shares looked to be too high, given that Scapa was now trading with an enterprise value to earnings multiple of 10 times.

Analysts at Jefferies have a price target of 320p. They forecast a 20-25% cut to consensus EPS estimates for 2020 and between 15% and 20% for 2021.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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