Shares of bonding and adhesive specialist Scapa Group (LSE: SCPA) climbed by 8% this morning, after the firm said that sales and trading profit should be ahead of expectations for the year ending 31 March.
It’s the second upgrade to profit guidance in five months — expectations were also lifted in November, at the time of the group’s half-year results.
Scapa’s business is making specialist adhesive tape for industrial and healthcare applications. This may sound like a dull business, but the share price has risen by 466% over the last five years and by 18% so far in 2017.
However, today’s statement makes it clear that exchange rate movements have made a big contribution to this year’s growth. Although sales in the healthcare division rose by 16.5% last year, only 5% of this was due to increased trading. And some of this growth was the result of an acquisition made in May 2016.
My reading of this is that underlying healthcare sales growth is less than 5%. If exchange rates stay flat, then this year’s comparable figures won’t benefit from a currency boost and could be much lower.
That’s not to say Scapa isn’t a good business. Cash generation is impressive. Its net debt is expected to have fallen from £29m to £16m during the second half of last year as the firm repays borrowings used to fund the £28.3m purchase of EuroMed in May.
Scapa stock now trades on a forecast P/E of about 27, with a prospective yield of 0.6%. That’s not cheap, but recent earnings upgrades suggest to me that Scapa may beat expectations again in 2017/18.
A breath of fresh air
Ventilation firm Volution Group (LSE: FAN) sells the kind of fit-and-forget product that no modern commercial building or home can manage without. Brands you may be familiar with are Vent-Axia and Manrose, but Volution has 13 operating businesses in total, serving a mix of countries and business sectors in northern Europe.
Companies whose products are dull but essential can often make great investments. Volution certainly seems to have promise, in my view. The firm’s stock has risen by 33% since its flotation in June 2014, and it now has a market cap of £382m.
The group appears to be expanding through a mix of acquisitions and organic sales growth. This seems to be working well. Volution’s adjusted earnings per share rose by 14.1% to 12.6p last year. This rate of growth was maintained during the first half of this year, when adjusted earnings rose by 14.1% to 6.54p.
These figures match the firm’s free cash flow almost exactly. My calculations indicate that free cash flow before acquisitions was about 12p per share last year, and about 6.5p per share during the first half of this year.
I’m always encouraged when a company’s free cash flow closely matches its earnings, as this suggests that its profits are genuine cash profits that can be used to fund growth and pay dividends.
Volution shares currently trade on a forecast P/E of 14 with a prospective yield of 2.1%. Although the group would be exposed to a major downturn in the European construction market, these figures look attractive to me. I believe further gains are quite likely.