Cape - Captain Oatley is on course

Cape (CIU.L): We are in strange times, when abnormally high yields are becoming more common, especially in the case of stocks exposed to the natural resources markets. In the case of BHP Billiton it can only be achieved by slashing at costs and capex, whilst hoping for a turn in the cycle. However, at the previously troubled Cape, the dividend looks to be a lot better grounded. The well-regarded Joe Oatley is captaining his little £275m tub through some huge rough seas, with some notable success. Whilst resource stocks react to low commodity prices by battening down the hatches, they still have to look after and protect what they have. As a supplier of “critical industrial services”, Cape is still needed and wanted, as shown by recent deals with ExxonMobil and BP. These interim results to 5^th July 2015, benefitted from an extra week’s trading, with ongoing revenue up 13.2%, although a 30bps margin drop to 6.9% left adjusted pre-tax profits up 5% at £21.2m. A higher tax rate resulted in eps nudging ahead 1.6% to 13.0p, covering the maintained 4.5p dividend nearly three times. Net debt was barely changed from a year ago, at £131.3m, despite the acquisition of Redhall Engineering. Across the regions, MENA performed well on margin expansion, although within Asia, Australia was tough and in pan-Europe the UK was weak.

Visibility for the business is picking up with order intake of £399m, as against £317m in the same period last year. The total order book is now £800m, having been £746m six months ago and £643m a year ago. As such the board reckons that the second half will be in line with expectations. Further out 2016 is still uncertain (no surprise given the commodity market backdrop), but I would point out that the strengthening order book is encouraging.        Consensus eps forecasts, for 2015, should hold around 27p, so even after today’s bounce to 229p, that is a PE of just 8.5x. A maintained dividend of 14.0p is a yield of 6.1%. Despite the wretched state of commodity markets, there is a good chance that consensus forecasts for 2016 of ‘same again’ can be met. So Cape is in self-help mode, selling at very cheap valuations, with a stonking yield. I know that the shares fail the dividend growth criteria just now, but I would be on board all the same, which is pretty much the same conclusion as in March when the shares were 235p. (Neil Cumming^, 26^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower