Despite a challenging environment, Scapa Group performed particularly well in Q4 of 2016 as a result of strong trading trends in its Healthcare and Industrial segments combined with growth through acquisition and foreign exchange benefits. Over the quarter, the stock is up 25.7%, and 58.2% over 2016. The company announced that after a strong performance so far this year, it should deliver higher returns than previously expected in its full year 2016 financial accounts.

Company Profile

Scapa Group Plc is a global supplier and manufacturer of bonding products and adhesive components for the healthcare and industrial markets. The company operates in two segments: Industrial and Healthcare. The industrial side of the business manufactures and distributes adhesive bonding solutions and applications for industrial use, where the healthcare side is involved in advanced wound care, medical device fixation and drug delivery markets. The company offers a wide range of products on a global scale, selling and manufacturing in European, North American and Asian markets.

Competitive Advantage

Scapa is highly competitive within the market due to its worldwide service and supply chain capabilities, allowing the company to partner with global customers. The company’s management team are focused on continuous innovation and sustainable growth, which has been a key element of Scapa’s success in recent years.

Scapa’s two business segments: healthcare and industrial operate completely separately, each with their own focus and strategy which allows each segment to compete based on their individual markets.

Within the healthcare market, companies have been increasing their engagement with outsourcing partners with increased production efficiencies, allowing new products to reach the market sooner and at lower production cost. As a result of this trend, and its comprehensive supply chain capabilities, Scapa Healthcare is currently a leading strategic outsource partner of choice in the Advanced Wound Care, Consumer Wellness, Medical Device Fixation and Drug Delivery markets. Additionally, Scapa Healthcare has a portfolio of development projects with existing and emerging healthcare companies which ensures that the continuous innovation which is demanded in the healthcare market is sustainable.

Within the Industrial segment, Scapa Industrial is also highly competitive within its market, and operates on a global scale. The segment has a strategic focus on maximising Return on Capital Employed (ROCE) through operational efficiencies, increasing profit margins.

Quality of Earnings

Scapa published a strong set of financial results for the first 6 months of the financial year to 30th Sept 2016 in November. The interim results showed revenue growth of 13.5%, an increase of 27% in trading profit, and an increase of 28% in the company’s adjusted Earnings Per Share. The depreciation of Sterling against the Euro and US Dollar positively influenced the 6 month results, however underlying figures adjusted for the effects of exchange rates showed a healthy revenue growth of 3.7% and a 12.4% increase in trading profit. Based on the financials, the company is in a strong position, with strong cash generation, revenue growth and a healthy balance sheet.

Throughout the period, it is worth noting that net debt increased from £2.6m to £29m reflecting the acquisition of EuroMed on the 23rd May 2016. The full impact of the acquisition on revenues will be evident in the full year results announced in around May 2017.

Growth Potential

Scapa continues to grow through acquisitions to supplement organic growth within the company. Particularly within the Healthcare segment of the business there is constant demand for innovation, therefore Scapa continues to seek to offer new technology whether developed internally or via acquisitions. The most recent acquisition was EuroMed, a US-based hydrocolloid-based wound care solutions business. It is expected that the newest acquisition will significantly enhance the firm’s innovation and development capabilities, strengthening the value chain and deepening strategic engagement with healthcare customers. The company is currently raising funds via the placement of new shares in the market which could indicate that further acquisitions may be made before the end of the financial year.

Key Risks

Brexit
As a UK-based company, naturally a perceived risk is Britain’s exit from the European Union following the Brexit vote in June. According to the company’s management, Brexit is not likely to have a material near-term impact on the business or its growth. The group currently generates less than 10% of its revenues in the UK, with 50% of revenues being denominated in US Dollar, and a further 25% of revenues denominated in Euros, therefore a weakened Sterling is beneficial.

Exchange Rate Risk
Scapa has significant operations outside of the UK, therefore is exposed to currency rates risk, particularly a weakening of the US Dollar.

Inflation
Scapa is exposed to potential supplier price increases, therefore this is a risk that must be monitored going forward, however the group is currently working within its strategy to increase margins to protect against any potential supplier increases.

Overview

Overall, Scapa appears to be in a strong position both within the market and financially. The firm continues to deliver a strong performance despite a challenging market environment, with increased expectations for the Group’s full year results in May. It is our view that the company is well managed and well positioned going into 2017 to continue to benefit in the current market environment as well as in the long term through sustainable growth.

 

 

 

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