It will be a long road back for Scapa’s share price but at least its recovery has begun
The tape maker has suffered many misfortunes since we tipped it. Now its solid response to coronavirus has reassured investors
HINDSIGHT tells us that we chose a bad time to pick Scapa, the maker of industrial and medical tapes, for our Inheritance Tax Portfolio of Aim‑quoted shares. Our tip was in March 2018, when the shares were at virtually their record high. It’s been a long descent since then.
The shares have fallen by a thoroughly painful 77pc over that period, and the fact that the market too is much lower – the FTSE 100 has lost 25pc since the day of our tip – is scant consolation. We have covered the company’s various setbacks in the intervening months. They included disappointing announcements about trading, the loss of a major contract, the resignation (later rescinded) of the chief executive and the death of an employee in an industrial accident. All hit the share price. Then coronavirus came along and the shares halved again. Last month we finally had some good news. In a trading update Scapa said sales in the three months to the end of June had been “well ahead of its Covid‑19 scenario plan”. It added that trading in both the medical and industrial divisions had continued to improve into the current quarter.
“Scapa acted swiftly to implement structural costs changes across the business in response to the impact of the Covid‑19 pandemic on the reduction in product demand, as well as ensuring variable costs were closely managed to match the new demand levels,” its update said.
It said its management of working capital – which can sound arcane but has been the undoing of many an otherwise sound business – remained strong, while debt was much lower than at the end of the previous financial year, partly thanks to a sale of new shares in May. Scapa said the result of its measures and the improvement in trading was that “the group’s outlook on full‑year trading profit is trending approximately 10pc ahead of market expectations”. Beating the market’s profit expectations is a certain way to send the shares higher and they rose by 36.9pc on the day, although they have slipped a little since then. It is sure to be a long road back but we will stick with it. Hold.
Update: Gamma Communications
We have done rather better with this firm, a supplier of telecoms services to businesses: the shares have gained 145pc since we added them to our IHT Portfolio in January 2018.
They suffered, along with so many others, in the panicky first weeks of the pandemic but have more than recovered those losses since then and are not far off a record high reached early last month.
The interim results, published earlier this month, did the share price no harm. The company reported a 12pc rise in sales to £177m and a 21pc increase in profits before tax to £26.2m. Gross margins nudged up to 53pc. The firm generated plenty of cash and the dividend was increased by 11pc to 3.9p. The shares hardly look cheap at about 33 times forecast earnings for this year, although the ratio falls to about 29 times when we look at next year’s forecast profits. The firm has been a consistent performer and we will hold.
Income Portfolio update: Urban Logistics Reit
As an owner of distribution warehouses for online delivery, it’s no surprise that this real estate investment trust has done well during the pandemic. Since we tipped it in January last year the shares have gained about 23pc.
The trust wants to expand and has identified some “high‑quality logistics properties that meet the company’s investment objectives”. It intends to raise the money to acquire them by selling new shares. Most will go to institutions but private investors will be able to take part in a “retail open offer”.
Details of the offer, including the procedure for application and payment, will be set out in a circular expected to be published next week. The new shares will be sold at 139p, while the current market price is 143p.
However, the new shares will not carry the right to a special dividend of 3.25p that the company declared for existing shareholders, so the saving is small. Hold.
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