Technical tapes firm Scapa a classic yield play

However you look at Scapa, it's an attractive proposition. On the valuation front, the stock looks dirt-cheap. Although a recent profits warning knocked the shares back (and dented confidence in a jittery market), the company remains resolutely profitable, boasts a single figure prospective p/e and should yield 5.3 per cent this year. On top of that, net worth tops three times the current price.

As far as corporate activity is concerned, there is also much to intrigue investors. Speculation surrounds the motives of Swedish entrepreneur Peter Gyllenhammar. Known for taking stakes in, and shaking up, undervalued industrial asset plays, Gyllenhammar recently revealed that two entities in which he has an interest (Erudite UK and Browallia Discount Company) collectively hold 8 million shares, or 5.52 per cent.

Scapa is a global technical tape supplier. It operates in 15 countries – in Europe, North America and Asia. The Blackburn-headquartered firm makes a variety of standard and custom-engineered products that are used to assemble, insulate, protect and repair products and components across a diverse range of industries.

Its seven key market sectors are medical, cable, automotive, industrial assembly, sports and entertainment, printing and graphics and construction. In terms of sectors, chief executive Tony Watson says medical makes up about ten per cent of sales, cable about 17 per cent, and the automotive sector ten per cent, with 63 per cent encompassing 'all the rest – traditionally we've seen the higher margins in the medical and cable sectors'.

The products for all of these areas range from the humdrum to the super-sophisticated. For instance, for the medical sector, Scapa makes hypoallergenic adhesive products for dressings and medical disposable devices. 'These allow you to put wound management materials onto heavy duty burns and wounds, then remove them without the skin coming off,' says Watson.

Sadly, the numbers have been less impressive of late. For the six months to end-September 2002, Scapa reported underlying pre-tax profits of £3.3 million – virtually half the comparable figure for the first half of 2001.

To be fair, the results were affected by a cost reduction programme. But chairman Dr Keith Hopkins also warned that customers were still not rebuilding stock levels and that sales growth would be 'restricted' as a consequence.

This cautious outlook was reinforced by a profit warning in February. Scapa warned full year pre-tax profits (before goodwill and exceptional items) would miss market estimates of about £7 million by a significant £2 million.

At this stage, Hopkins complained that trading in most of Scapa's European and UK markets had been even more difficult than expected, with demand sluggish in Germany, France and Italy in particular. The European businesses will lose money in the second half of the financial year.

In North America, the picture is brighter, but still mixed. Strong sales of new products, combined with cost cuts, are likely to produce sales ahead of expectations. The only negative is the continuing weakness of the dollar against the pound – which will reduce operating profits in sterling terms.

Looking further ahead, the board insists studies have confirmed the fundamental growth prospects of the specialist technical tapes market. 'It's seeing about three to four per cent of real growth a year,' comments Watson.

For the year to March 2003, Merrill Lynch says investors should expect lower profits of £5 million on sales of £187.6 million. Profits should recover to £6.2 million in 2003/4 and to £8.8 million in 2004/5.

That leaves a very modest earnings multiple and an attractive yield. But what has been powering the shares – up from 13.5p at the start of April to 21.5p now – is that mounting Gyllenhammar stake.

Scapa

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