A letter from Blackmoor Investment Partners to Chris Brinsmead, Chairman of Scapa Group plc, outlining Blackmoor’s full confidence in Scapa’s company strategy and the reasons why Schweitzer-Mauduit International Inc.’s bid is not representative of Scapa’s value today or its significant future growth and value creation potential in the coming years due to a number of factors.
Blackmoor Investment Partners Limited
35 Dover Street
3 March 2021
Scapa Group plc
We have had a further opportunity to talk with Heejae and your advisors since our letter of 2 February. We wanted to update you on our thinking and position.
As we discussed previously, Scapa Group plc ("Scapa" or the "Company") has had numerous challenges in the last 24 months which have required investment and held back the Company’s financial performance. We believe that the Company is now well positioned, with the right strategy and the required resources, to deliver on its potential as set out by you and the rest of the leadership team.
Now is not the time to sell the Company, and certainly not at Schweitzer-Mauduit International Inc.’s ("SWM" or the "Bidder") low bid of GBp210/share. The Company is a valuable asset today with significant potential in the coming 2-5 years:
The Company and the Bidder both cite 2020 multiples. 2020’s earnings were depressed at both divisional and Group level and are not representative of the Company’s intrinsic value; the 2020 period included a number of challenges at revenue and trading margin levels leading to the Company reporting Group EBITDA falling 13.5% from 2019 to 2020 (EBITDA margin fell from 14.7% in 2019 to 12.4% in 2020).
In the Industrial division, the issues were internally driven. We understand that corrective action was taken, a self-help agenda initiated, and performance has improved. While COVID-19 has impacted a number of sectors – automotive, construction, consumer – we also understand that those sectors are experiencing a strong recovery and the division’s revenue is now tracking above pre-COVID-19 levels. That management commentary and our analysis underpin our view that the Industrial division can grow at 2%-3% pa (market growth) for the coming 5-10 years and achieve 13%-14% trading1 margins (13.1% in 2019 vs. 11.6% in 2020).
The Healthcare division is one of the few global CDMO platforms (contract, development, and manufacturing organisations) and is well positioned for both organic and add-on acquisition driven growth in the coming years, being highly regarded globally for its development and manufacuting capabilities. While the Convatec client loss was a backward step and impacted scale efficiencies, recent technology transfers and organic growth prospects are encouraging; Heejae and his team confirmed in November 2020 that they have confidence in a ‘robust pipeline’ of further technology transfers, a recovery from de-stocking and elective deferrals, and highlighted the Company’s CDMO potential with impressive NPD growth (new product development). That management commentary and our analysis underpin our view that the Healthcare division can grow at 5%-10% pa (market growth+NPD+technology transfer) for the coming 5-10 years and achieve mid-teen trading margins (as per pre-Convatec contract/scale loss, 14.8% in 2019 vs. 9.0% in 2020).
At a Group level, the Company has invested to build a strong platform and has consequently numerous accretive acquisition opportunities which are valuable but which are not factored in as they are forward looking. Secondly, the Company has an outstanding USD84m legal claim against Convatec, which has significant potential value that selling now would ignore.
SWM’s bid is backward looking, is selective on the period it promotes itself, and gives no value to the significant improvement potential in the coming years that exist as a result of your and the executives’ efforts over the recent years. Our growth and profitability assumptions suggest a target 2022/2023 EBITDA of ca.GBP50m, which is supported by numerous sell side analysts that cover the Company, e.g., Jefferies: published an upgrade on 17 December 2020, 2022/23 EBITDA target of GBP49.7m, 12 month target share price of GBp210/share, and 12 month upside target share price of GBp290/share.
Assuming a fair value of 12x EBITDA (a blend of Industrial and Healthcare market multiples, and supported by Mergermarket analysis in their article of 24 February 2021) on 2022/2023 EBITDA, and assuming the Company is debt free by that time, this implies a 2 year forward target share price of ca.GBp320/share. Even if we adjust that target share price for time and execution risk, selling today at GBp210 in not an attractive option.
We continue to hold 5,983,577 shares or 3.2% of the share capital of the Company, and based on the potential outlined above we will vote against the SWM scheme. We have spoken with a number of our fellow shareholders and we strongly believe that the current scheme will not pass at either the value or the number test levels.
We recognise that you and the Board have recommended the scheme and Heejae has executed an irrevocable undertaking. We want to reiterate in the strongest possible terms that a ‘no’ vote for the scheme is not a vote of no confidence in you and the team. It is quite the opposite. We fully support Heejae and his team and believe in their ability to complete the strategic journey they began a number of years ago and deliver the potential that they set out to realise.
For your information, we will be sharing these views with our follow shareholders and the media as appropriate.
We remain at your disposal to discuss our position.
Blackmoor Investment Partners Limited
About Blackmoor Investment Partners Limited
An industrially minded, long-term investor in and supportive owner of high quality European public companies.
We typically own significant minority stakes in our companies, and partner with management and fellow shareholders to implement value creation strategies.
Blackmoor is an independent investment firm wholly owned by its Partners.
1 As defined by the Company, trading profit = profit before exceptional items, acquisition costs, amortisation of intangible assets and legacy pensions costs = EBITDA after Depreciation.
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