Once again, Cape is a "recovery play" after another disappointing profit warning.
"non-mechanical" maintenance services to energy and mining projects, issued its third profit warning last week – this time caused by a slowdown of work in Australia.
The news came shortly after the new chief executive, Joe Oatley, took the helm. Mr Oatley is a former chief executive of oil and gas engineer Hamworthy and he took up his position at the end of June. The current non-executive chairman of the group is Tim Eggar, a former energy minister in John Major's government.
Following a tour of the group's operations, Mr Oatley concluded that both revenue and margins in its Australian operations will fall short of previous expectations.
This followed a warning in May when the group took a £14m hit after it revealed a large project it was working on in Algeria would make a loss. This was down to delays in construction at a new liquefied natural gas (LNG) plant to which it had a contract to supply insulation material.
The issue in Australia is different, however. Essentially, fewer contacts are being awarded than expected and, because the group has relatively high fixed costs this will have a disproportionately large impact on margins. The news prompted a 35pc slump in the share price, hitting a 3-year low.
Cape has immediately started a review of the structure of the business in Australia and started a cost-reduction plan. Trading conditions declined dramatically in Australia and Cape has failed to replace the completed work on the Pluto LNG plant in Western Australia. That contract completed in the first quarter of this year.
Australia appeared to be a key driver of future profits, as a number of large energy and mining projects are being built there. However, soaring costs are now a significant issue in the country, which has seen its currency rise from 50c to the dollar in 2005 to $1.05 now. Cape's Australian resource customers get their revenues in US dollars but their costs are in Australian dollars.
It is now possible we will see some writedowns of assets in the Asia-Pacific region and some restructuring costs. Cape also said that margins were under pressure in the Middle East, with the UK being the best performing unit.
So, are there any positives? Investors can now hope that Mr Oatley has managed to get all of Cape's skeletons out of the cupboard. His review has not uncovered problems with any other contract apart from the Algerian debacle.
Also, guidance looks like it will now be more conservative. This is good news as it gives the company room to beat expectations in the future.
Questor last said buy the shares on May 2 when they were at 417p. They are now at less than half of that level, so this warning is obviously terribly disappointing. The shares are now trading on an earnings multiple of 7 falling to 4.8 next year, based on revised forecast.
The company is paying a dividend – last year it was 14p. If the payment is held, this would be a prospective yield of 7.2pc.
Therefore, Questor now rates the shares a hold. However, investors seeking a recovery play may wish to consider the shares for the more speculative part of their portfolio.