Scapa’s smart new strategy could deliver big upside
It plans to use clients’ own facilities to boost capacity and win new contracts
Bonding solutions specialist Scapa (SCPA:AIM) is worthy of closer attention thanks to an intriguing new technology transfer strategy to support growth in its healthcare division. Scapa supplies bonding solutions and manufactures adhesive-based products for the healthcare and industrial markets.
Its industrial division accounts for approximately 60% of sales and focuses on adhesive components for a range of tapes for cable wrapping and packaging.
The healthcare division generates 40% of sales, partnering with market leaders to design, develop, manufacture and commercialise skin-friendly adhesives for wound care and medical devices.
WHAT IS A TECHNOLOGY TRANSFER?
Under its new strategy, Scapa plans to use so-called technology transfers where it buys a manufacturing site or a unit at a depreciated value from a client. It also receives a manufacturing contract on behalf of the client.
Scapa is taking advantage of more pharmaceutical companies outsourcing services, allowing them to focus on other areas such as marketing and branding.
Technology transfers will help Scapa acquire more capacity and increase production without significant outlays of capital.
It could also lead to recurring revenues by encouraging customer loyalty and speeding up product development times.
Over the last year, Scapa sealed technology transfers with a wound care business and a global consumer product firm.
WHY SPENDING £25M A YEAR COULD YIELD 30% UPSIDE
Berenberg analyst Benjamin May speculates £25m of spending on technology transfers every year could yield ‘at least 30% upside’ to his estimates for Scapa over the next three years. On the back of forecast-beating annual results, May upgraded earnings before interest and tax (EBIT) expectations by 1% in 2019 and 2020 to £38.1m and £40.6m, respectively.
For 2021, EBIT is anticipated to jump 7% to £43.1m. Forecasts for sales, earnings per share and dividends were also hiked over the next three years.
Scapa trades on a 21.8 times forecast earnings per share (EPS) for the year to 31 March 2019 and so isn’t cheap.
If the stock hits the 520p target price set by Berenberg the PE ratio would be 26.8 times, at current EPS estimates. We believe such a premium rating is justified based on Scapa’s good track record and growth strategy. Further levers for growth include organic gains and M&A, as well as manufacturing efficiencies and upselling in the industrials division. Berenberg argues Scapa can benefit from reducing changeovers in manufacturing lines and upselling services to its larger clients.
HEALTHCARE ACCOUNTS FOR 40% OF SALES