Today's Falling Knife: Cape Slumps 37%

Published in Company Comment on 1 August 2012

Cape (LSE: CIU) owns up to further problems in the Far East.

Cape (LSE: CIU) slumped 106p, or 37%, to 184p this morning to become the session's heaviest casualty in early trade.

The engineering services contractor admitted the trading performance of its Far East/Pacific Rim division had "deteriorated sharply" during the second quarter, with margins at the operation expected to reduce to approximately half of those seen during 2011.

Cape said it was more exposed to the "construction support services cycle" in the Far East/Pacific Rim area than in other, more mature, regions in which the firm enjoyed leading market positions.

Cape also claimed the deterioration at the Far East/Pacific Rim operation would have a significant effect on the group's overall performance in the near term. Cape added the challenging conditions in the Far East/Pacific Rim would persist into 2013.

Today's statement underlined the old adage that 'profit warnings come in threes'. In May, Cape's shares plunged 27% after the firm warned of problems with a contract in Algeria that would cost the mid-cap £14 million.

Then in November last year, a cagey statement that referred to "ongoing margin pressures in the Middle East and the risk of project scheduling delays during 2012" wiped 29% from the share price.

With Cape shares down a thumping 69% since their 2011 peak, clearly the business has its problems. Certainly in today's knife-edge market, smaller companies can be punished severely if they hit trouble.

But Cape does have a history of collapsing share prices and super-strong recoveries.

During 2008 for instance, the shares plunged from above 300p to as low as 18p -- but have since generated a ten-fold return despite the aforementioned profit warnings.

Then between 2000 and 2002, the shares crashed 90% to as low as 6p, but went on to expand 50-fold within five years.

Such life-changing returns suggest it may pay to keep an eye on Cape for another recovery.

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> Maynard does not own any share mentioned in this article.

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Comments

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trmeer 01 Aug 2012 , 1:33pm

I bought 400 Cape shares @250p just after the last profit warning. Just bought another 400 today at 180p. I value the company at around 500p based on past and projected earnings so I see this as a great value opportunity. Also even if earnings fall below 30p a share, which is unlikely, the dividend is still covered twice and is now about 7.5%.

Bombadil79 02 Aug 2012 , 12:59pm

This was one tipped by Mark Slater of the MFM Slater Growth, and son of the famous Jim Slater. I wonder if he has sold out of Cape or reduced his holding?

rigbyf 03 Aug 2012 , 10:42am

I have just topped up my isa with these. Would be interesting to know what Mr Slater has done.

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