Investment: Steer clear of Scapa for now

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The Independent Online
SCAPA, the industrial group, has always been regarded as a currency play. When sterling has been weak the company has prospered. It is no surprise, then, that the past 12 months have been harsh for investors, with the share price dropping by more than half.

Scapa's main problem is its almost total reliance on exports, as well as a substantial exposure to Asia. It is estimated that the company has lost up to pounds 12m in the past two years on currency volatility alone.

Chairman Harry Tulley bemoaned "very poor trading conditions," with its core market - paper machine products - contracting by 6 per cent this year and expected to shrink a further 4 per cent next. So, while yesterday's announcement of a 16 per cent fall in half year pre-tax profits to pounds 24.5m was better than expected, it did little to restore confidence. The shares, up 4.5p to 104.5p yesterday, are still well below their level of 230p in January.

But there is some cause for long-term optimism. The restructuring programme announced in February appears to be ahead of schedule. And the company will use the strength of sterling to its advantage, continuing its strategy of picking up cheap manufacturing plants in Asia.

Nevertheless, it is difficult to get excited about anything in the UK industrial sector in this economic climate. The pounds 51m in full-year pre- tax profits which analysts forecast puts Scapa on a forward earnings multiple of just over seven. This may look appealing at first glance, but it is certainly not uncommon for the depressed manufacturing sector.

So, while Scapa has probably been oversold recently, there is little chance of a short-term shift in sentiment to get the stock moving. For the time being, Scapa is one to be avoided.