China To Drive Cape's Dividend

Published in Company Comment on 30 March 2012

This internationally expanding industrial is committed to dividend progression.

As part of its policy of targeting markets with strong fundamental growth drivers, FTSE 250 non-mechanical industrial services provider Cape (LSE: CIU) has recently made an acquisition in Hong Kong, which it aims to use as a springboard for further expansion into Greater China.

The company specialises in multi-user work access systems, insulation, fire protection, abrasive blasting, refractory, asbestos removal, coatings, cleaning, training and other essential non-mechanical services to major industrial groups, principally in the energy and natural resources sectors.

Progressive returns

I first came across the company when it featured on my favourite share screen. Today's 425p share price provides a thrice-earnings-covered trailing dividend yield of 3.3%, which City analysts following the company are guessing will rise to 3.6% by the end of 2012 and 3.9% in 2013.

It seems likely, as in a generally strong set of full-year results released on 6 March, the directors raised the dividend by almost 17%, and declared their commitment to a progressive dividend policy. The reason for their confidence appears to be trading momentum that has continued into the new year where Cape is gaining traction in its chosen markets.

International revenues

Those markets have a wide geographical spread, with just 42% of revenue derived from the UK. The company's Chinese ambitions will augment 29% turnover already derived from the Far East, and there's 21% from the Middle East.

Cape employs 19,000 people in 30 countries and carves out its competitive advantage by offering a range of specialist multi-disciplinary services specifically tailored to provide the most intelligent and cost efficient solutions for its customers' in-plant maintenance and capital needs, according to the directors.

It must be doing something right because the order book is up 9.7% to around £940m this year.

The figures

Cape has been something of a recovery play over the last decade. Ten years ago, its adjusted share price was just 25p, and in 2003, the company moved from the main London market down to AIM.

Fast-forward to 2011 and Cape rejoined the FTSE 250, its success driven by strong trading, which shows in the figures:

 20072008200920102011
Revenue (£m)429623655650722
Operating profit (£m)3652(6.5)7575
Net cash from operations (£m)748667936
Diluted earnings per share26p26p(3.4p)41p39p
Dividend00012p14p

There's been a steady increase in revenues, which has filtered down as cash-backed profit, eventually leading to the payment of well-covered dividends. The profit anomaly showing in 2009 was due to a one-off provision for asbestos liabilities, designed to write them off entirely.

What looks like a negative in the low cash flow for 2011 could actually be quite positive, with the directors putting it down to "working capital outflow of £43m, driven by record activity levels in Q4 and timing of investments and receipts on four major projects", and there's still around £20m of free cash flow to cover the roughly £15m cost of 2011's dividend.

Meanwhile, there's been stellar progress with the balance sheet, too:

 20072008200920102011
Net assets (£m)190246268369406
Total borrowings (£m)209199180149130
Gross gearing110%81%67%40%32%

Despite the company's acquisitive history, it has been steadily paying down debt and building net asset value. Gearing is now at a modest level and, according to the end-of-year report, there's around 342p of asset value per share, 59p of which is unrestricted cash.

That strikes me as a firm foundation upon which to build further growth.

Valuation

At prices around 425p, Cape can be picked up on forward price-to-earnings ratios of about nine for 2012, and eight for 2013, according to following-analysts predicting 5% and 14% earnings growth respectively.

In news still wet with printer ink, the 10-year-serving CEO Martin May is to step down, with immediate effect, to pursue other challenges. Non-executive director Brendan Connolly is to hold the fort while the company searches for a permanent replacement.

It's always uncomfortable for investors when the boss quits, but I understand that May is something of a turnaround specialist and, arguably, Cape has turned, so it seems natural that he should seek a new challenge.

What now?

Cape isn't afraid to get its hands dirty providing essential, if unglamorous, services to worldwide industry. I like that. My Yorkshire-born grandmother would've known what to do. "Where there's muck, there's money," she'd have said.

I'm fully invested right now, but if the shares find their way anywhere near the 300p level they traded at in December, perhaps due to sentiment spooked by the CEOs departure, the value will become compelling. I'm happy to add these to my watchlist for now.

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