VALUE INVESTING
Scapa Group

By Stephen Bland (TMFPyad)
September 1, 2000

Scapa (LSE: SCPA) is in the chemicals sector. That does not mean, however, that it resembles large companies like ICI (LSE: ICI) which predominantly manufacture chemical substances for others to use in their own processes. Scapa makes end user products, specifically tapes, adhesive films and cable products.

It is not in my view a mere chemicals company, but one of the difficulties with sectoring the market is that there will sometimes be companies that do not quite fit, and consequently have to be placed in a sector that is nearest to their business, even though they may not to a large degree resemble the other constituents of the sector.

As far as I can establish, Scapa is unique in the British stock market for its products. Reading about the company, I discover that its biggest competitor is the famous US company 3M (LSE: MMM), followed by a Japanese company Nitto Denko and the German company Beiersdorf.

Scapa states that in technical tapes it has a 5% share of the market against 22% for 3M. Incidentally by the expression "technical tapes" they are not referring to recording tape but things like tape to shield electrical components in mobile phones, to attach medical instruments to skin and so on. Highly specialised stuff, not commodity style sticky tape or recording tape.

Here are the fundamentals:

• Share price 154p
• High/low this year 160/114
• High/low five years 274/91
• Market cap £223m
• Earnings per share year ended 31/03/00 (loss) 1.2p
• Forecast earnings per share year ending 31/03/01 consensus 13.2p, lowest 11.6p
• Forecast earnings per share year ending 31/03/02 consensus 14.1p, lowest 14.0p
• Price/Earnings (P/E) ratio historical nil; on 01 lowest forecast 13.3; on 02 forecast 11.0
• Yield on historical dividend 5.0%; on 01 forecast 5.0%
• Price/Book Value 2.2
• Gearing -22.6% (i.e. net cash)
• One year relative strength -14% (ie. negative)
• Directors own only 0.07% of the shares
• Other major holders own 39.5%

For a value share, the P/E is not that low. Most of the proposals at which we look on the value shares board have P/E ratios under 10. It is, though, well under the definition I use in the deep value shares in which I tend to invest, which sets a limit of 2/3 of the market.

So what are the value features? Well it has a lot of net cash. £26m as at 31 March 2000 but in a statement made by the chief executive a few weeks ago he commented that their net cash position has now reached £40-45m. The yield is reasonably good, not huge but way over my value minimum which I set at 50% over the market.

Price/Book is high for a value share, but then Scapa, indeed none of the shares in this series, are meant to be the kind of deep value shares that I particularly enjoy. The idea is to look at a somewhat weaker set of criteria, in order to throw up more selections so that readers can get an idea of the general approach.

Value does not have a fixed set of rules; each person makes their choice from the cookie jar of various fundamental facts and ratios with which they are most happy. I am perhaps at an extreme end of the game with my deliberately very tough filters because I prefer to hold only one or two shares and consequently need to minimise the downside to the limit. Others who prefer to hold a portfolio of value shares can accept lesser criteria, can accept somewhat higher risks perhaps in their individual holdings, because that is countered by spreading the number held. What I am aiming to show with the series is that this can work quite well, as always careful selection being the key.

So in order to find sufficient numbers of shares for the series I had to give way on some of my cherished value filters and it has been Price/Book that I have let go for this purpose on most of them. Generally P/B is the toughest filter to satisfy if you conduct a trawl across the market especially in recent years as the market has been rising. The second one is net cash, which is of course not a price-based ratio.

Apart from the fundamentals, what else is there in Scapa to indicate some upward momentum? Essential, this, to out the value. I am attracted by what the chief executive had to say in July. Amongst other bullish noises he commented that "the business is a cash generator". Given my predilection for net cash in a business this is music indeed.

Scapa has sold off poorly performing businesses which contributed to last year's loss. Those sales are one of the reasons for the current net cash position, together with the cash generated by the trade. Those disposals only add to the value perception in my view.

In summary, then, a very interesting niche business. In some ways I see bit of a resemblance to the much smaller API (LSE: API), which makes specialist packaging foils and so on. API was a great value share for a me a while back which I wrote about here. Possibly a boring business, but value usually is so. If you look at the companies I have featured I doubt many of them could be characterised as exciting. Construction, insurance, banking, money broking, department stores, steel, engineering and now tapes and adhesive films. Old hands will recognise that boring is beautiful in the value game.

And my usual comment: this is possibly an attractive one for portfolio value players. It is not a share into which I would sink everything.