Are Cape plc and Oxford Instruments plc today’s top turnaround buys?

Today’s updates from Cape plc (LON:CIU) and Oxford Instruments plc (LON:OXIG) contained some very mixed news.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of industrial services firm Cape (LSE: CIU) fell by more than 15% this morning, after the firm warned that it may be forced to scrap the dividend if it loses a new legal case.

In this article, I’ll ask whether the potential rewards of Cape’s high yield outweigh the risk of an investment. I’ll also ask whether it’s time to buy technology firm Oxford Instruments (LSE: OXIG), following the group’s latest disposal.

Asbestos claims could sink dividend

Cape’s latest trading update had two parts. The first section indicated that recent trading has been in line with expectations. Full-year profits are expected to be slightly better than expected, thanks to recent exchange rate movements.

The latest consensus forecasts show that Cape is expected to report full-year adjusted earnings of 24.4p per share. This puts the stock on a forecast P/E of just 6.6, with a forecast dividend yield of 8.7%.

Extremely high yields and low valuations are usually a warning that the market expects problems. Cape is no exception. The group said this morning that it has increased the provision made against industrial disease claims by £9.6m. That’s not great news, but it isn’t the reason for today’s dramatic slump.

The final part of today’s update warned shareholders that new product liability litigation relating to Cape’s historic use of asbestos could lead to “an extended period of uncertainty.” Management warned that if the case goes against Cape, the dividend could be suspended.

This case was previously reported in last year’s results, but the tone of today’s statement is more negative than previously. Although Cape believes “the merits of our defence are persuasive,” the group admits that there’s no certainty about the outcome.

Markets hate uncertainty, and this is why Cape shares are so cheap, despite the group’s solid trading. In my view, the stock is too speculative to buy at the moment.

Oxford could be a better choice

Shares of Oxford Instruments are worth 20% less than they were at the start of the year, but I believe the outlook is improving for this maker of hi-tech industrial tools.

The company said today that it had sold its superconducting wire business (OST) for $17.5m. Trading had been difficult for some time, and while OST is profitable, Oxford’s figures show that OST’s operating profit fell by 33% during the first half, to just £1.1m.

Cash from this sale will be used to reduce Oxford Instrument’s net debt, which was £141.1m at the end of September. This represents a level of 2.6 times earnings before interest, tax, depreciation and amortisation (EBITDA). Net debt of more than two times EBITDA is generally considered high, so I’m pleased that the group is focusing on debt reduction.

November’s interim results suggest Oxford Instruments’ trading has stabilised. Adjusted earnings from continuing operations were just 1.4% lower, at 21.4p per share. The interim dividend was left unchanged at 3.7p.

This year’s results are expected to be broadly unchanged from last year, but consensus forecasts suggest earnings could rise by about 10% in 2017/18.

The shares currently trade on a 2016/17 forecast P/E of 12, and offer a 2.1% yield. I believe this could be a good time for turnaround investors to start buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »