Companies: CIU   

Support services provider Cape is a beneficiary of the energy and natural resources sector boom. Without its expertise, its customers would not be able to continue to efficiently produce power or extract natural resources. Trading was particularly strong last year and Cape is off to a flyer in buoyant markets in 2008. Yet the shares are modestly rated.

Turnaround expert Martin May, chief executive, has done a good job of transforming Cape from a stagnating business into an important supplier of outsourcing services to the oil and gas, construction and petrochemical sectors. Growth in demand for energy and natural resources has now made it even more important that production facilities are utilised as much as possible and that routine maintenance is carried out promptly, thereby minimising any downtime.

All of the AIM-quoted company’s main regional markets, which include the UK, the Far East, the Middle East, Australasia and the former Russian states, are prospering. The range of services Cape offers includes insulation, scaffolding, specialist coatings, industrial cleaning and fire protection. It is the group’s ability to provide a bundle of these services that helps it clinch contracts – some of which can be up to ten years long. At the end of 2006, Cape’s order book covered 70 per cent of budgeted turnover for 2007 as well as a significant chunk of 2008’s forecast revenues.

Last year was a particularly busy one for the company in terms of acquisitions. In the second half, Cape completed the purchase of two former Australian Stock Exchange-listed companies. Western Australia-based PCH provides scaffolding and access management services, while Victoria-based Concept Hire

supplies scaffolding equipment to the construction, mining and petrochemical industries. The companies cost £95.1 million and £52.4 million respectively. May says the integration of these two businesses should provide opportunities to reduce costs, with the benefits likely to show in the current year.

In September, Cape negotiated a £240 million debt facility with Barclays, which helped to provide the funding for the Concept Hire and PCH deals. Broker Numis estimates that net debt was less than £190 million at the end of 2007, compared with £21.1 million at the beginning of the year, which gives an indication of Cape’s significant spending on acquisitions during 2007. However, Cape is keen to show that it can generate cash

from its operations and believes it can reduce that debt figure by the end of 2008.

Another investment positive is Cape’s potential return to the dividend list – the company has not paid one since 2000. Although Numis has not pencilled in a payment for 2008, Cape has said that it would like to reward its shareholders, and has restructured its capital to give it distributable reserves. The scheme of arrangement relating to Cape’s historic asbestos liabilities will determine whether the company is able to pay a dividend. One can only be paid if the scheme is at least 110 per cent funded – the first review is later this year.

Following Cape’s recent pre-close trading update, Numis upgraded its 2007 earnings per share forecast by ten per cent to 23p, leaving Cape trading on a 2007 earnings multiple of just 9.7 times. Full-year figures in March should provide some guidance concerning the integration of recent acquisitions, and analysts are holding back on any forecast upgrades for 2008 until then. Cape trades on only 8.8 times 2008 earnings and offers the potential for upgrades.