Scapa. Primer. 31 May p. Margin expansion has further to run

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1 31 May 2012 Scapa 61p Margin expansion has further to run Although Scapa s headline revenue has been relatively stable during the industrial cycle of , the company s management, product mix and strategy have undergone radical change. The tape business is in better shape than at any time in its history: PBT reached a ten-year high in FY12. Margins are set to continue their upward trend, enabling Scapa to deliver double-digit earnings growth even in a flat market The self-help strategy is delivering results Following the management overhaul in FY10, Scapa embarked on a series of self-help initiatives that have enhanced margins independently of volume growth. Profitability was restored in FY11 and earnings nearly doubled in FY12. Scapa continues to improve efficiency and targets 8% EBIT margins in the medium-term; this implies plenty of growth from the 5.5% margins delivered in FY12. In the longer-term Scapa hopes to lift Group margins close to the double-digit levels achieved by its larger peers. To achieve this, Scapa will have to widen its service offering, a strategy exemplified by the recent acquisition of Webtec in the US. Webtec manages entire product ranges for global healthcare majors, providing a suite of turn-key services including design, manufacture, distribution and after-sales support. Scapa can grow profits without draining cash When profitability turned a corner in FY11, cash generation leapt ahead. The net cash balance increased by 8m in FY11, and even after an initial payment of $30m for Webtec, Scapa ended FY12 with 7m net cash. With capacity utilisation running at around 60%, profit growth can be delivered without the need for significant investment. Most of Scapa s capex spend is discretionary and focused on cost out projects with a rapid payback May 2010 May 2011 May 2012 TIDM SCPA Market cap ( m) 88.5 Net cash (FY1) 7.6 Free float (%) 100% Avg daily volume (3m) 892k Broker Arden Partners Listing AIM Outlook and valuation Scapa s potential for margin improvement means that it can deliver rising earnings growth even in a flat market. Despite the political turbulence of the last couple of months, Scapa s European revenues have held up well. Around two-thirds of Scapa s European business comes from the UK, Germany and France. On headline numbers, Scapa is trading on a P/E of 14.0x. This metric is distorted by non-cash writedowns in Scapa s deferred tax assets which will exaggerate the taxcharge in FY13 and FY14. Adjusting out this distortion leaves Scapa on a P/E of 11.5x, an undemanding rating for a company with the potential to deliver earnings growth well ahead of GDP. Philip Sparks, CFA research@broker-profile.com Sales PBT EPS Net Cash P/E EV/EBITDA Yield ( m) ( m) (p) ( m) (x) (x) (%) FY12a FY13e FY14e

2 Investment case Although Scapa s EBIT margins have returned to positive-territory, at 5.5% they remain well below those of its peers. The industry s No. 2 and No. 3 players (Nitto Denko and Tesa) make double-digit EBIT margins; the No. 1 player (3M) makes EBIT margins of 20-30% across its product range. We forecast that Scapa s margins will trend upwards over the next few years, driven by: - Mix changes. Scapa s sales mix has undergone a marked shift since the credit crunch. Healthcare now makes up 50% of Group profits. The Industrial division has identified its most profitable customers, and sales resource is being focused accordingly. - Synergies and cost controls. During the long period of tough trading from 2002 to 2008, Scapa spent much of its time restructuring individual acquisitions rather than integrating them into a unified group. With the crisis now behind it, Scapa is centralising back-office functions and fully-exploiting its SAP systems. Management also has time to pay attention to detail. There are 134 on-going projects which aim to shave cost from the 90m spent on materials and freight each year. - Growth in the Electronics division. Scapa s Korean business is in start-up mode. Getting it to break-even would increase PBT by 4%; getting its margins to a similar level as the Healthcare business would increase PBT by more than 15%. - A broader service offering. Scapa has historically focused on tape production and conversion, but large customers are increasingly looking for multi-disciplinary partners that can manage all aspects of a tape product. Webtec, acquired by Scapa in December 2011, provides turn-key services to global healthcare companies. We expect Scapa to grow its turn-key business, organically and potentially via acquisitions. - Higher capacity utilisation. Although Scapa is currently more focused on margin expansion than on the overall level of sales, it is can easily meet additional demand if the revitalised marketing strategy results in volume growth. Capacity utilisation is currently around 60% so Scapa could push additional gross margin through its existing production lines without having to ramp up capex. Scapa is ungeared and well-placed to take advantage of acquisition opportunities as they arise. This is an extremely fragmented industry, and despite being the 10 th largest player globally, Scapa has only 2% market share. Scapa has no desire to buy tape manufacturing capacity future deal targets must bring new customers and additional expertise (e.g. design, marketing, conversion facilities), just as Webtec did. Our forecasts assume stable trading conditions over the next two years. We are looking for organic revenue growth of just 1.5% pa for the next two years, and for EBIT margins to reach 6.7% in FY14. Assuming a constant tax rate, this would result in compound earnings growth of 16% pa. At 61p, Scapa s shares are trading at 11.5x our FY13 EPS forecast (after stripping out the non-cash effects of deferred tax writedowns). This rating is undemanding given Scapa s potential to deliver double-digit earnings growth for a prolonged period. It is also a discount to sector peers such as Zotefoams ( 66m market cap, FY13 PE 14x) and Carclo ( 266m market cap, FY13 PE 20x). 2

3 Outlook Current trading The strategy of self-help over volume growth is delivering results After two years in the red, EBIT margins returned to 4.2% in FY11 and rose to 5.5% in FY12. To call this a recovery would erroneously imply that the improvement was driven purely by the economic cycle; in fact, much of the margin improvement is a result of self-help initiatives that sought to improve margins without relying on volume growth. In the last two years Scapa has: recruited a new senior management team and refreshed 40% of its staff; introduced cell-based manufacturing; altered designs to reduce waste material; rationalised product lines; and streamlined procurement. It also focused sales efforts on its most profitable lines and deliberately exited low-margin business via a series of targeted price hikes. Volumes were down slightly in FY12, but EPS rose 90%. Nowadays Scapa is as much a Healthcare company as it is an Industrial Demand for cyclical products appears to be stable-to-good, even in Europe Revenues in the Healthcare division will be double those delivered three years earlier (est 53.5m vs 26.2m in FY10), thanks in part to a 17m contribution from Webtec. Healthcare s EBIT margin of 13.9% is more than twice that of Industrial (4.9%) and Healthcare profits should match those of the Industrial division in FY13. Given that Scapa is deliberately reshaping its sales mix, the reported numbers reveal little about how the economic cycle has impacted results. Still, certain product areas have performed surprisingly well. Sales of Scapa s Barnier brand, for instance are up 9%, despite a moribund construction market in Europe. Some of this growth is down to Barnier s marketing initiatives (see page 9), but it would be hard to deliver growth if demand was under severe pressure. It appears that despite the turmoil in Europe s periphery countries, Scapa s cyclical businesses are holding up. Ironically, the UK government s moves to reduce corporation tax have exaggerated Scapa s reported tax rate. Scapa has 28m of tax assets relating to: historic losses, its pension deficit and other provisions. The value of tax assets is marked down each time the corporation tax rate reduces and the hit is taken in the Income Statement. In FY12 this accounting phenomenon exaggerated the reported tax charge by 0.6m, taking it to 4m (a reported tax rate of 39%). Utilisation of tax losses meant that Scapa paid out only 0.9m in cash taxes in FY12. Outlook We believe that margin-driven earnings growth can continue for several years Scapa believes it should be able to reach 8% margins without radically changing its business mix. That target that looks feasible given that the industry-leader (3m) earns operating margins of 20-30% across its tape product range. Assuming a stable market, we expect Scapa to deliver double-digit earnings growth during our two-year forecast range. Our FY14 EBIT forecast is 6.7%; we believe there is potential for margins to rise beyond that level in the medium-term. There is plenty of scope for further efficiency gains. There are currently 134 ongoing selfhelp projects covering themes like freight optimisation; VAT arrangements; material procurement; invoicing procedures etc. Scapa spends more than 90m on materials and freight each year; a couple of percentage points shaved off that figure would boost PBT by 10-15%. 3

4 The economic outlook for Europe is difficult to call, but less than 20% of Scapa s revenue comes from European countries outside the UK, Germany and France Getting the Electronics division to break-even would boot Group margins The pursuit of efficiency gains over volume growth gives Scapa a degree of protection from the vagaries of the economic cycle, but profits are volume-dependent and our forecasts assume a stable trading environment. If the European economies were to take a severe turn for the worse, we would have to revise our numbers. This risk is mitigated by Scapa s limited exposure to periphery nations two thirds of its European revenue comes from the UK, Germany and France. Although it is a relatively small part of Scapa s business, the Electronics division has the potential to make a noticeable impact on profit growth. It is currently in start-up mode and lost 0.8m in FY12. A design win into a hit product would transform its fortunes. Scapa is building up its relations with the leading Korean OEMs (Samsung and LG). We feel that Scapa s investment will at some point reap rewards, but it is difficult to predict exactly when the division will move into the black. To achieve the medium-term target of double-digit margins, Scapa will have to widen its service offering to capture additional margin from the value chain. Its acquisition of Webtec heralds a push towards greater vertical integration, and the company s strong balance sheet means that it could take advantage of similar acquisition opportunities should they arise. Balance Sheet and Cash Flow Scapa ended FY12 with 7m of net cash Throughout the 2000s, several issues hampered Scapa s cash generation: difficult trading; serial restructuring programmes; legal defence costs; and pension top-up payments (see page 5). Now that margins have improved and the major restructuring programmes have come to an end, Scapa is generating cash. Net cash rose by 8m to 19.4m in FY11, and even after an initial payment of $30m on the Webtec acquisition in FY12, Scapa ended the year with 7m in the bank. Pension deficit reduction payments and legal defence costs vs operating cash flow 20m 20m 15m 15m 10m 10m 5m 5m 0m FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 0m Cash generated by operating activities, before pension deficit reduction and defence costs Cash devoted to pension deficit reduction and defence costs Cash generated by operating activities Source: Scapa accounts and Broker Profile estimates In December 2011, Scapa took out a 20m 4.5-year unsecured credit facility charging 1.75% over LIBOR. Swaps have been taken out fixing the effective all-in rate at 2.5%. Scapa intends to re-introduce a progressive dividend at some point, but is wary of exacerbating the group s operational gearing. This implies that the resumption of dividend payments is dependent on further margin improvement. 4

5 Capex Scapa has plenty of spare manufacturing capacity and a full SAP IT system Scapa currently has little need for growth capex: after a decade of tough trading and the more recent strategy to rationalise product lines and eschew low-margin business, capacity utilisation in Scapa s tape production plants is a comfortable 60%. Tape production equipment suffers little wear and tear some of Scapa s lines have been in operation for several decades. The maintenance and health & safety capex requirement is less than 1m pa. Development capex is typically spent on cost out efficiency projects such as upgrades to control systems. Scapa invested 10m over installing SAP CRM and planning modules, and these systems are still in use today. The FY11 accounts show the historic cost of Scapa s IT as 18.7m, and management believes that the SAP system is not being used to its full potential. It should be possible for Scapa to extract further benefits from its existing IT infrastructure with relatively little investment. Scapa s machinery and IT systems require little maintenance capex Plant and machinery IT systems Balance sheet value at Mar Historic cost at Mar Depreciation charge in FY Additions in FY Balance sheet value at Mar Historic cost at Mar Depreciation charge in FY Additions in FY Source: Scapa plc Legal costs Scapa has never had to pay out on an asbestos claim, but it does contribute to insurers legal costs One of the businesses sold by Scapa in 1999, Scapa Waycross, is a co-defendant in 295 pending US lawsuits covering 7,172 claimants who are seeking damages for exposure to asbestos fibres when they worked on Scapa Waycross machinery. There are several factors that mitigate Scapa s risk, and cases involving more than 26,000 claimants have been thrown out by the courts in the last 18 years. Only one case, involving three claimants, has succeeded following an appeal, and Scapa s insurers paid the $0.9m damages. Although Scapa has never had to pay out on a claim, it does cover 25% of the legal costs of defending these claims (its insurers pay the rest). These ongoing costs do not distort Scapa s reported profits as they are covered by a 5.7m provision in the balance sheet, but they do act as a drag on cash. Of the 8,116 claims outstanding, around 7,000 are considered dormant, thus the cash drain from defence costs should wind down in the coming years. In 1H12, the cash spend on defence costs was 0.2m. Tax and pension payments Scapa s FY11 balance sheet showed an asset for 10.7m of tax losses, and the cash tax spend should be lower than the Income Statement charge for the next few years. We are looking for cash tax payments of 2.2m in FY13 and 2.5m in FY14. Scapa s pension deficit stood at 29m (net of deferred tax) at March Scapa s pension contributions in excess of the income statement charge averaged 4.2m a year between FY05 and FY12 and we estimate these payments will be c 5m in FY13 and FY14. 5

6 Company overview Brief History Scapa waited until 1988 to enter the tape business via a series of acquisitions. It became a pure-play tape business in 1999 The acquisitions of the 90s and early 00s underwent a costly downsizing between 2000 and 2009 After a revamp of the management team in 2009, Scapa embarked on a self-help programme to improve margins The company made its first acquisition for six years in December 2011 Scapa was founded in 1927, and originally it supplied dry-felts to the paper industry. The group entered the industrial tape business in 1988 via a series of acquisitions in the UK, Europe and US. Scapa sold its paper business in 1999, for 336m. It returned 120m to shareholders, repaid 125m of debt, and left the company focused on tapes. The following decade was not kind to Scapa, nor its shareholders. A long period of tough trading between 2000 and 2009 resulted in the closure of 11 production facilities and one head office, 33m of goodwill writedowns and more than 70m of restructuring charges. Legal costs and pension payments absorbed much of Scapa s operating cash flow. The shares lost 90% of their value between 2000 and 2003, and languished until September 2009, when the company underwent its second management overhaul in five years. After Heejae Chae was appointed CEO in late 2009, Scapa initiated a number of self-help initiatives to drive up margins. New senior managers were appointed from outside the group, filling leadership positions in Operations, HR, Commercial, Healthcare, Development and Manufacturing (see page 14). The company s sales mix shifted towards its most profitable lines, due to cyclical factors and a deliberate strategy to focus sales efforts on high-value customers. In FY12 Scapa delivered its highest PBT for a decade. The strategic changes were mirrored in Scapa s first acquisition in six years: in December 2011 Scapa made an initial payment of $30m to buy Webtec, a high-margin medical business. Scapa s EBIT, restructuring spend and share price performance March March m 15m 10m 5m 0m 120p 90p 60p 30p 0p - 5m - 10m FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Adjusted operating profit Exceptional costs (exc goodwill writedowns) Share price on Mar 31 (RHS) Source: Scapa plc, AlphaTerminal Since 2009, the only production facility to have shut was a small unit in Carlstadt, USA, closed at a cost of 1.7m in Two distribution centres were closed in FY11 and FY12 (Barcelona and Mannheim, Germany); in each case the closure costs were taken as a normal operating expense. In FY12 Scapa opened a new Electronics line in Korea and acquired Webtec for $30m cash (plus up to $15m deferred) in FY12. 6

7 Products Tape manufacture Scapa s products have two main constituents: an adhesive and a substrate backing. Some tapes incorporate a non-stick liner to protect the adhesive during storage. The adhesive qualities of a tape are often its key differentiator. Some tapes must hold fast once applied (e.g. tapes used to fix automotive components), others must be removable after use (e.g. masking tape), and some must allow the product to be removed and reapplied repeatedly (e.g. a wound care product). Tape manufacturers are extremely protective of their proprietary adhesive recipes. Scapa uses a wide range of substrates, some derived from natural products (e.g. cotton, paper, rubber), some chemical (e.g polythene, PVC). Scapa makes some of its substrates in-house by extruding raw materials into film. The final stage of a tape production line Conversion Source: Scapa plc A batch of tape comes off the production line as a jumbo roll, typically metres wide and weighing up to 300kg. To transform the tape into a form that suits the end user, jumbo rolls are put through various conversion processes. Scapa sells jumbo rolls to distributors and dedicated conversion businesses, and undertakes conversion work itself. Some conversion processes are as straightforward as cutting the tape into narrow strips and packaging it as handy-sized rolls. Other process are much more complex. For example, converting an adhesive tape into a simple sticking plaster requires the tape to be perforated and stamped into individual pieces. These pieces then have an absorbent pad placed precisely in the centre and two non-stick liners mounted. The plaster must remain medically sterile throughout. Adhesive tapes and converted products Source: Scapa plc 7

8 Applications Healthcare Healthcare tape products are applied to skin The best known adhesive tape applications in the Healthcare sector are the sticking plasters sold under brand names such as Elastoplast and Band Aid. Webtec, acquired by Scapa in FY11, manages product lines for household-name healthcare companies. Manufacturing quality is paramount contaminated product could lead to skin irritations or even infections. Customers are prepared to pay a premium for trusted brands. Healthcare products can utilise advanced medical technology. They can deliver drugs (a la Nicorette patches), prevent infection, diagnose skin complaints and even change colour when they are due to be replaced. Example Healthcare applications: wound care pads and nasal expanders Source: Google Healthcare contracts are high-margin, long-term and offer good earnings visibility Scapa has developed proprietary Healthcare materials and can deliver multi-disciplinary turn-key solutions Scapa s Healthcare contracts can last for the entire life-cycle of the customer s product, and offer good earnings visibility. The timing of customer product launches can have a significant impact on numbers, and revenue growth comes in fits and starts. After a couple of good years of organic growth, Scapa s Healthcare sales (before the Webtec contribution) were flat in FY12. The comparable period of FY11 was boosted by a customer building up stock in new product, and another customer line came to the end of its life-cycle. Scapa has a number of proprietary tape platforms to which medicinal products can be applied, including its Soft-Pro silicone adhesive and Bio-Flex breathable polyurethane film. Its scientists, based at R&D sites in Europe and the US, work closely with pharmaceutical and healthcare companies to integrate medicinal and diagnostic compounds into tape-based products. Scapa also stays abreast of medical developments through close links with university research departments. Webtec gives Scapa an interesting platform through which it can push new products. Its turn-key service offering extends to R&D it can take a healthcare partner s product; design and develop a skin-friendly delivery solution; test it; submit it for regulatory approval applications; manufacture it; package it and distribute it. This end-to-end involvement, from development to supply, results in extremely loyal customers. 8

9 Industrial Scapa s Industrial line covers a diversified range of products and markets The Industrial line in Scapa s accounts captures all sales outside the healthcare, electronics and transport industries. Notable end-markets include construction, automotive, aerospace, telecoms, packaging and athletics. The construction industry uses tapes for temporary and permanent fixing solutions, emergency repairs and visual demarcation products. These general-purpose consumable tapes are usually sold to the end-user via specialist retailers such as builders merchants. An example application for Scapa s Barnier brand: plasterboard tape Source: Scapa plc, Howarth Joinery Telecoms cables are shielded with tape for electrical insulation and physical protection. Tapes are specified according to flexibility, electrical resistance, waterproofing, durability, etc. Scapa s Renfrew brand sells specialist tapes for hockey players (handle grips, blade protectors, shin-guard tapes, etc). Renfrew also sells athletic tapes that can support ligaments and introduce additional resistance for training purposes. Example applications for Scapa s Renfrew brand: hockey stick protection and grips; shin-guards Source: Scapa plc, Scapa s main automotive exposure comes through wiring tapes for French car makers, but the market opportunity is much wider. Tapes have replaced mechanical fasteners in many car components. Automotive tapes are specified according to durability, bond strength, temperature range, fire resistance, longevity, etc. The aerospace industry eliminates weight by using adhesive tape instead of mechanical components wherever possible. 9

10 Electronics Scapa is targeting high-volume electronics market with a new line in Korea The electronics industry is obsessed with driving down component costs, increasing manufacturing speed and reducing the size of circuit boards. To this end, adhesive tapes have replaced mechanical screws in all manner of electronic devices. In early FY12 Scapa shut a low-margin cloth line in Asia, and invested 1.2m in a new R&D facility and production line in Anyang, Korea. The Electronics division is in start-up mode (it made an operating loss of 0.8m in FY12) but the investment will see a major payoff if Scapa becomes a preferred supplier to Samsung and/or LG. Electronic tapes are manufactured to tight specifications for bond strength, thermal conductivity, electrical capacitance, electrostatic protection, thickness, surface finish, etc. A 4-inch smartphone may contain over a dollar s worth of high-spec tape. Scapa s Korean facility is focused on focus on AFT (acrylic foam tape) and AFFT (acrylic film foam tape). Scapa s tape solutions for smartphone manufacturers Window lens mounting Speaker cushioning Microphone cushioning Touch screen panel mounting LCD module mounting Camera cushioning Source: Scapa plc Until recently Scapa s electronics exposure has come mainly from commodity products sold via distributors. The continual drive to make mobile devices smaller and flat-screen TVs thinner means that OEMs tape specifications are becoming increasingly technical. To be a serious player in the electronics space, Scapa needs to build on its existing relationships with Samsung and LG and win contracts to supply advanced tape solutions. 3M dominates the market. OEMs have a policy of dual-sourcing components where possible, but this is tricky with tape because adhesive recipes are proprietary and impossible to reverse-engineer. Suppliers contend with short-product life-cycles and secretive customers. In order to design a tape for a forthcoming electronics device, the manufacturer must know the material to which it will be attached; only trusted vendors are given advanced notice of smartphone designs. 10

11 Routes to market Retailers and merchants Approximately 20% of Scapa s output goes to specialist retailers Around 20% of Scapa s products leave its factories in retail packaging, ready to appear on the shelves of builders merchants, DIY sheds, supermarkets, sports outlets etc. These packages can be badged for specific distributors, or sold under Scapa s own brands: Barnier for the construction industry and Renfrew for the sports industry. Scapa is developing its brands and thinking like a retailer; it recently introduced the Barnier System which includes externally-sourced products and comes with in-store displays. Both of Scapa s own-brands grew sales by 9% in FY12. OEMs approximately 30% goes directly to OEMs Around 30% of Scapa s Industrial business comes from OEMs that use application-specific tapes as permanent components in their products. The Electronics division hopes to get the bulk of its work from OEMs. Because tape makers use proprietary adhesives, OEMs often specify a tape made by a particular manufacturer. Once a tape has been designed into a product, that manufacturer can expect long-term repeat sales. Scapa has a direct relationship with many global manufacturers - notable customers include Rolls-Royce, Boeing, Prysmian Cables, ITT, LG, Nokia and Nexans. The technical nature of these relationships means that OEMs take-up more sales resource than distributors, but efforts are rewarded with high-margin, long-term contracts. Turn-key just under 10% is designed, manufactured, packaged and shipped to retailers under a turn-key customer s name Following the Webtec acquisition, around 8% of Scapa s revenue comes from turn-key solutions. Turn-key products are designed, manufactured, packaged and distributed by Scapa, but retail under the turn-key customer s brand. The brand-owner need never take physical delivery of the product, as Webtec can deliver the packaged product direct to the retailer s point-of-sale. Turn-key contracts are high margin, long-term and have high barriers-to-switching. As Webtec controls many separate processes, its customers would need an extremely good reason to risk their profit stream by transferring production/quality/packaging/distribution to new suppliers simultaneously. Converters and distributors and approximately 40% goes to distributors and converters Around 40% of Scapa s total output is sold to distributors and independent conversion firms. Although these channel customers are an important source of volume, they have to make a profit themselves, so the overall margin opportunity is below that of Scapa s ownbrand, OEM and turn-key products. Scapa is focusing its sales efforts on its high-margin customers, so the proportion of sales to channel customers should reduce over time. 11

12 Geographic exposure Scapa has 11 production sites across the globe: six in Europe, five in the US and one in Korea. The US facilities have a bias towards healthcare products, the European facilities have a bias to Industrial and transportation, and the Korea facility serves the electronics market. Manufacturing locations Location Type of facility End markets UK, Manchester Tape production Industrial, Transportation UK, Dunstable Tape production, conversion Healthcare France, Valence Tape production, conversion Industrial, Transportation Italy, Ghislarengo Tape production, conversion Industrial, Transportation Switzerland, Rorschach Tape production, conversion Industrial, Transportation US, Knoxville TE Conversion Healthcare US, Inglewood CA Conversion Healthcare US, Syracuse NY Film Industrial, Electronic US, Windsor CT Tape production Industrial, Transportation, Healthcare Canada, Renfrew Tape production Industrial Korea Tape production, R&D Electronics Source: Scapa plc Each manufacturing facility acts as a sales office, and Scapa has additional sales offices in China (3), India (2), Korea (2), Malaysia (1) and Brazil (1). Sales by geography are recorded according to the sales office that took the order. Sales by geography Europe North America Asia Source: Scapa plc The geographic diversification of Scapa s end-users is wider than the chart above suggests, as many of Scapa s customers make products for global export markets (e.g. consumer electronics, aerospace, healthcare). 12

13 Market share dynamics 3M, Nitto Denko and Tesa supply about half the global market Scapa s three largest competitors - 3M (US), Nitto Denko (Japan) and Tesa (Germany) control around half the $25bn industrial tape market. If these three companies are the gorillas in the sector, then 3M stands out as the alpha male - it is twice the size of its nearest rival, and its EBIT margins are double those of most competitors. The giants of the tape industry Company Domicile Group sales Tape sales (est) Tape EBIT margins 3m US $27bn $9bn 20-30% Nitto Denko Japan $8bn $4bn 10%* Tesa Germany $1.3bn $1.3bn 12% * Nitto Denko s margins were disrupted by the Japanese tsunami in FY11. Source: Broker Profile estimates Scapa is the tenth largest player globally and there is an extremely long tail of small manufacturers. Beyond these three major players, the industry is extremely fragmented. Scapa is the tenth largest player globally, but has less than 2% market share. There are hundreds, if not thousands, of manufacturers and converters with a lower turnover than Scapa. Potential for acquisitions There may be other opportunities for value-enhancing acquisitions like Webtec. Management have no desire to buy companies that would merely boost tape manufacturing capacity; future deal targets must bring new customers, strong management and additional expertise (e.g. product design, conversion facilities), just as Webtec did. Vertical integration will allow Scapa to capture more margin from the value chain and drive incremental volume through its existing tape production plants. 13

14 Appendix: Management The senior management team has been completely overhauled since All the Executives and Leadership Team (see below) have joined since Heejae Chae became CEO in late The next tier of management has also been refreshed - 90% of the senior sales team joined the company within the last two years, as did 80% of the senior manufacturing managers. Of Scapa s 1,200 employees, 40% joined the firm less than three years ago. Executive Directors Heejae Chae joined in September 2009 and became CEO in November Previously CEO of Volex Group plc; General Manager, Radio Frequency Worldwide, for Amphenol Corporation. He spent the early part of his career in finance at The Blackstone Group and Credit Suisse First Boston before moving into industry. Paul Edwards joined as FD in September Previously FD of NCC Group plc. Paul is a Chartered Management Accountant and MBA and spent the earlier part of his career in the manufacturing, logistics and services sectors. Non-Executive Directors James Wallace joined the Board in August 2007 and became Chairman in October He is currently also Chairman of the Nominations Committee. An accountant by qualification, he spent the majority of his very successful executive career at Pifco Holdings PLC until James has held various Non-Executive Director positions and was Chairman of Bodycote plc from January 2002 until April Currently James is a Non-Executive Director of Manchester Airport Group plc and Cryptologic Ltd. Richard Perry was appointed to the Scapa Board in June 2005 and is Chairman of the Audit Committee. Richard is currently Group Finance Director of Fenner plc to which position he was appointed in He was formerly a senior audit partner with Price Waterhouse. Mike Buzzacott joined the Board in March 2008 and is currently Chairman of the Remuneration Committee. Mike has extensive experience of the global chemicals industry where he spent 14 years in operational roles in BP Chemicals, before retiring as Group Vice President Petrochemicals in Mike is currently Non-Executive Director at Genus PLC and Croda International Plc. 14

15 Leadership team Ian Marchant joined in February 2010 as Group Operations Director. Prior to joining Scapa, Ian held a number of senior management positions with two international manufacturing businesses, Avon Rubber plc and General Electric Inc. Tracy Sheedy joined Scapa in September 2010 as Group HR Director. Before joining the Company, Tracy was Head of Organisation and Capability Development with BAE Systems. Prior to this Tracy held senior HR roles with ConvaTec, Georgia Pacific and Monsanto. Ralf Seufert joined Scapa as Group Commercial Director in October Before joining Scapa he was VP Sales & Marketing and member of the Board at Quadrant Plastic Composites AG in Switzerland. He has previously worked for GE Advanced Materials in senior management positions for global application development and sales. Joe Davin joined Scapa as Group President Healthcare in September He has over 30 years of experience in the medical equipment industry. His most recent role was Group President at Spacelabs Healthcare, a global provider of patient monitoring, anaesthesia, diagnostic cardiology and clinical information solutions with US$215 million in turnover. Randy Holmes joined Scapa as Director of Global Development through the acquisition of WEBTEC Converting in December 2011, where he was Founder and CEO. He has spent most of his professional career in contract manufacturing of adhesive backed medical devices. 15

16 Income Statement Ye a r e nding Ma rc h m FY1 0 a. FY1 1 a. FY1 2 a. FY1 3 e. FY1 4 e. The Webtec acquisition adds approx. 17m of revenue and 2.5m of EBIT from Dec 2011 The Healthcare division and Scapa's 'own-brand' consumer tapes have delivered good organic growth, while Scapa has dropped some low-margin business from distributors The Korean Electronics operation is in start-up mode and needs to score some high-volume design-wins to move into profit. Timing is difficult to predict. The reported tax charge includes writedowns in Scapa's deferred tax assets (these are a result of the UK's falling corporation tax rate). Scapa's cash tax charge is much lower than this figure, and we exclude the wrtiedowns in our Adjusted EPS calculation. R EVEN UE Healthcare Industrial Electronics Group revenue P R O F IT Healthcare Industrial Electronics 0.4 (0.8) (0.1) 0.1 Head Office (ex share-based payments) (0.9) (0.8) (1.0) (1.1) Share-based payments 0.0 (0.1) (0.4) (0.4) (0.4) Trading profit (1.5) Operating exceptionals Goodwill amortisation (0.4) (0.4) (0.4) Reported operating profit (1.5) Net interest income (0.2) (0.3) (0.3) (0.5) (0.5) Pension finance charge (3.1) (1.4) (0.7) (1.0) (1.0) Provision discount unwind (0.4) (0.2) (0.2) (0.5) (0.5) Reported PBT (5.2) Goodwill writedown adjustment Exceptional costs adjustment (1.4) Adjusted PBT (5.2) EAR N IN G S Tax 2.4 (2.6) (4.0) (4.5) (4.5) Profit attributable to equity shareholders (2.8) PBT adjustments (1.0) Tax adjustments Adjusted earnings (2.8) Reported EPS - basic (1.9) Adjusted EPS - diluted (1.9) DPS DR IVER S Healthcare revenue growth (%) Industrial revenue growth (%) Electronics revenue growth (%) (20.9) Group revenue growth (%) Healthcare operating margin (%) Industrial operating margin (%) Electronics operating margin (%) (7.8) (0.9) 0.8 Operating margin (%) (0.8) Effective tax rate (%) EPS growth (%) Source: Broker Profile 16

17 Cash Flow Ye a r e nding Ma rc h m FY1 0 a. FY1 1 a. FY1 2 a. FY1 3 e. FY1 4 e. Pension and legal payments absorbed much of the group's free cash flow between FY05 and FY10. Now that margins have recovered, these payments make up a much smaller proportion of operating cash The purchase of Webtec in Dec 2011 was Scapa's first acquisition for six years. There will be up to $15m of performance-adjusted consideration payments over FY13 and FY14 OP ERATING AC TIVITIES Reported operating profit (1.5) Depreciation Share-based payments Provision (utilisation) / creation (3.5) (2.3) (1.5) (1.0) (1.0) Profit from fixed asset sales (0.1) Excess pension contributions (5.0) (3.5) (5.0) (5.0) (5.0) Other operating items (0.2) 0.0 (2.9) Inventories (increase) / decrease 1.8 (0.7) 2.4 (1.5) (1.5) Receivables (increase) / decrease (0.2) Payables increase / (decrease) (0.5) (0.5) Interest (0.2) (0.2) (0.2) (0.5) (0.5) Tax (paid) (0.9) (2.2) (2.5) Cash generated by operating activities INVESTING AC TIVITIES Purchase of property, plant and equipment (2.2) (1.6) (2.6) (4.5) (4.5) Disposal of property, plant and equipment Acquisition of subsidiaries (18.0) (4.0) (2.0) Other investing items Cash used in investing activities (2.1) (1.3) (20.4) (8.5) (6.5) FINANC ING AC TIVITIES Dividends paid Equity issued (bought back) Debt issued / (repaid) 2.5 (2.2) Repayment of finance leases Other financing items Cash used in financing activities 2.5 (2.1) C H AN G E IN N ET C ASH Cash flow from continuing operations Effect of exchange rate differences 0.0 (0.1) (0.2) Net change in cash and cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents Liquid investments Closing gross debt (4.6) (2.2) (9.9) (9.9) (9.9) Closing net cash DR IVER S Change in working capital (1.0) (1.0) Change in net cash (2.4) 7.4 (11.8) before dividends, equity issues and M&A (2.4) Source: Broker Profile 17

18 Balance Sheet Ye a r e nding Ma rc h m FY1 0 a. FY1 1 a. FY1 2 a. FY1 3 e. FY1 4 e. Scapa is fully-insured for potential asbestos liabilities, hence its liability provision is offset by an equal insurance asset. Scapa has also provided for the legal costs of defending asbestos claims - this amounted to 5.7m at the end of FY11 Scapa has a 20m unsecured multi-currency facility, repayable in June 2015 BALANC E SH EET SUMMARY Goodwill and acquired intangibles Property, plant and equipment Investments Inventories Trade receivables Trade payables (32.1) (33.2) (34.7) (34.2) (33.7) Tax assets (ex pension) Tax liabilities (6.3) (6.5) (7.6) (7.6) (7.6) Derivative financial instruments 0.0 (0.1) Deferred consideration (9.2) (5.2) (3.2) Provisions (net of insurance assets) (12.7) (10.1) (9.3) (8.8) (8.3) Pension surplus (deficit) (38.6) (35.0) (38.9) (33.7) (28.5) Deferred tax on pension deficit Unadjusted capital employed Cash and cash equivalents Closing liquid investments Gross debt (4.6) (2.2) (9.9) (9.9) (9.9) Net assets C H AN G ES IN EQ UIT Y Profit for the year (2.8) Actuarial gains (losses) (10.9) Forex gains (losses) (0.7) (0.9) (1.2) Tax on items recognised in equity (2.0) (0.9) Comprehensive income (3.0) Dividends to shareholders Equity issued (bought back) for cash Share based payments Other items (0.0) Movement in equity (2.5) C AP ITAL AND RESERVES Called up share capital Share premium account Translation reserve Retained earnings Total equity Source: Broker Profile 18

19 Valuation Ye a r e nding Ma rc h 3 1 FY1 0 a. FY1 1 a. FY1 2 a. FY1 3 e. FY1 4 e. MARKET VALUE (GBP M) Share price (p) Market cap at 61p Average net debt (cash) (12.6) (15.1) (12.9) (7.3) (9.3) Net pension deficit (surplus) Enterprise value at 61p SP OT RATIOS AT 61P P/E (32.1) Adjusted tax rate (%) Adjusted P/E (70.0) EV / EBITDA G R O WT H R AT ES (%) Turnover growth EPS growth Source: Broker Profile 19

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