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The Investment Column: Exposure to the pound hits Scapa

Exposure to the pound hits Scapa

Scapa is not one of our best known companies. There is a mild flurry of excitement when people discover it owns Sellotape, but disappointment soon sets in when they realise is just the industrial version of the familiar sticky roll. Scapa has also suffered the indignity of being dumped in the chemicals sector, when in fact it makes paper rollers and industrial tape. Strange, but true.

What investors who have stuck around will know is that Scapa has given them a rocky ride. Shares in the company, which fell 7p to 232.5p yesterday on its half-year results, have seesawed from a high of near 270p in 1994 to well below 200p soon after, to regain their former peak in 1996.

Why so volatile? At first glance, its tempting to blame the notoriously cyclical prices of pulp - paper's raw material. Around half of Scapa's revenues flow from sales of industrial materials to paper manufacturers. But as paper manufacturers tend to pass-on pulp price increases to customers and as paper sales typically fall only slightly when prices rise, higher pulp prices do not really damage demand.

Scapa's international exposure is more to blame. Three-quarters of its business is conducted overseas and half of all UK output is exported. So Scapa's fortunes tend to rise and fall with the pound. In the first half, sterling knocked profits by pounds 4.9m in the six months to September, leaving the headline number down 3 per cent to pounds 29m.

Fundamentals look sound. Adjusting for currency, profits grew by over 10 per cent. Underlying performance of the paper materials sector was steady. The industrial tapes division, which accounts for one-third of revenues, performed strongly. Although speciality materials, including filtration, had a relatively weak six months, much of this due to sterling. Moreover, efficiency gains from cutting management as businesses have been grouped along global lines should flow in this year. On a forward rating of 11, fair.