Scapa Group Plc - Trading Update, Financing and Proposed Placing
This content has been sourced from: https://www.investegate.co.uk/scapa-group-plc/rns/...
Scapa Group plc
(" Scapa " , " the Company " or " the Group ")
Trading Update, Financing Arrangements and Proposed Placing
Scapa Group plc (AIM: SCPA), the diversified Healthcare and Industrial company focused on bringing best-in-class innovation, design and manufacturing solutions to its customers, today issues an update on trading and management actions during a period of unprecedented disruption as a result of the COVID-19 pandemic. In addition, the Group announces it has received credit committee approval from its lending banks for a new £15 million short-term facility, to sit alongside the Group's existing £80 million Revolving Credit Facility ("RCF"), and for certain temporary revisions to its covenant arrangements.
The Group also announces its intention to carry out a placing of new ordinary shares of 5 pence each ("Ordinary Shares") in the Company (the "Placing Shares"), (the "Placing"). The Placing is being conducted through an accelerated bookbuild (the "Bookbuild") which will be launched immediately following release of this announcement (such announcement and its Appendix together being this "Announcement"). Numis Securities Limited ("Numis") and Joh. Berenberg, Gossler & Co. KG, London Branch ("Berenberg") are acting as Joint Bookrunners (the "Joint Bookrunners") in relation to the Placing.
In conjunction with the Placing, Heejae Chae, CEO, and Non-Executive Directors David Blackwood, Brendan McAtamney and Tim Miller, as well as certain members of the senior management team of the Company, intend to subscribe for new Ordinary Shares (the "Subscription Shares") at the Placing Price (as defined below) to contribute approximately £335,000 in aggregate (the "Subscription").
The Placing Shares and the Subscription Shares will be issued on a non pre-emptive basis and will together represent up to approximately 19.99% of the Company's existing issued share capital.
- Trading update - The Group is expected to deliver record revenues for the year ended 31 March 2020, despite the loss of the ConvaTec contract. Statutory Group revenue increased 2.8% (1.1% constant FX) to £320.6 million.
- COVID-19 background and management actions - The Group is currently executing a well-developed COVID-19 action plan focused on cash management and actions taken to preserve liquidity based on immediate, short term (<90 days) and medium term (3-6 months) actions. The Group is expecting a period where revenues will be substantially impacted, particularly in Q1 FY 2021 and in early Q2 FY 2021, before returning to more normal levels, and in-line with management's pre-COVID-19 budget, from Q3 FY 2021 onwards.
- Bank facilities - The Group has received credit committee approval from its existing banking syndicate for a new £15 million short-term facility to sit alongside the Group's existing £80 million RCF, in order to provide additional liquidity, and for certain temporary revisions to its existing covenant arrangements.
- Proposed equity Placing and Subscription - The Group is proposing to raise up to approximately £30 million to strengthen the Group's balance sheet and provide flexibility to support future growth initiatives post-COVID-19. The Board consider it prudent to take action now in order to withstand the adverse financial impact caused by the disruption as well as to have sufficient resources to support ongoing operations and to provide flexibility to capitalise on any potential opportunities in a post-COVID-19 environment.
For the financial year ended 31 March 2020 ("FY 2020"), the Group is expected to deliver record revenues despite the loss of the ConvaTec contract. Statutory Group revenue increased 2.8% (1.1% constant FX) to £320.6m. Revenues on a continuing basis were flat with prior year.
Healthcare revenues grew 5.1% on a continuing basis (2.0% constant FX) for the year. Excluding ConvaTec, Healthcare revenues grew 29.8% on a continuing basis (26.3% constant FX) with the full year impact of Systagenix revenues being the main driver. Industrial revenues were 1.1% below prior year (-1.9% constant FX), this being primarily the result of adverse macroeconomic conditions, particularly in the automotive and specialty products markets.
Trading profit for FY 2020 is expected to be approximately £28 million, as announced in the trading update on 12 February 2020. Adjusted net debt as at 31 March 2020 of £54.4 million excludes the impact of IFRS16 Finance Leases and includes the impact of deferring £2.0 million of payments to the Group's pension schemes.
As announced on 7 May 2020, the Group expects to announce its results for FY 2020 on 23 June 2020.
COVID-19 background and management actions
The COVID-19 pandemic has impacted all territories and market segments in which the Group operates and, as such, all of the Group's sites are operating under government control measures enforcing mandatory lockdowns. Despite the ongoing lockdowns, all of the Group's operations, with the exception of India, are open, as both the Healthcare and the Industrial businesses have been classified as essential businesses.
The current restrictions on travel require strong local and frontline management to respond quickly to a very dynamic situation. The collaboration and positive relationships with the Group's employees and their respective representatives have been essential to the maintenance of our ongoing operations. Scapa has proactively implemented strict health and safety measures to ensure that any employee concerns are addressed and the Company is safeguarding their wellbeing.
The Company is currently executing a well-developed COVID-19 action plan that focuses on immediate, short term (<90 days) and medium term (3-6 months) actions.
Upon the commencement of the lockdown restrictions, the Group put in place a series of cash preservation actions. These included a reduction in the use of contractors within the Group's operations and minimal capex across the Group. Certain members of the Board and Executive management team have agreed to a voluntary temporary pay reduction of 20%, effective from 1 May 2020, and no cash payments in respect of the executive management bonus scheme are expected to be paid in respect of this current financial year. There has also been a deferral of any pay increases.
In addition, the Board has determined that the final dividend, which would ordinarily be paid in July 2020, should be suspended. The Group has also agreed with the Pension Scheme Trustee to defer the bi-annual contributions to the Group's UK defined benefit pension schemes for a set period of time to create additional flexibility.
The Group continues to assess government schemes in each operating jurisdiction that may provide either liquidity or tax benefits. These include the deferral of Canadian tax payments (expected to result in a deferral of c. £1.1 million) and reclaiming the French corporate tax payment of EUR200,000 which was made in March 2020. In addition, the Group is exploring additional liquidity schemes such as UK furloughing and has commenced applications to government schemes in France, Italy and the UK. The Group has been approved in the US under the Payment Protection Program and has received a government grant of c.$5 million; the grant is in the form of a loan which will be forgiven if Scapa's US headcount is not reduced for a period of eight weeks.
Over the medium-term (next 3 - 6 months), management will look to make further efficiency savings across the Group, including streamlining the organisational structure and re-aligning the geographic focus of the Group, re-adjusting the supply chain and re-engineering production capabilities, reviewing the product portfolio, reducing and standardising the Group's SKUs and focusing on e-commerce capabilities.
The Group has modelled a significant downside scenario ("COVID-19 scenario") that reflects the on-going and potential disruption to its business. Scapa is expecting a period where revenues will be substantially impacted, particularly in Q1 FY 2021 and in early Q2 FY 2021, before returning to more normal levels, and in-line with management's pre-COVID-19 budget, from Q3 FY 2021 onwards. As described above, the Company is undertaking a number of cost and cash preservation exercises and is adjusting working capital in-line with its revised revenue forecasts.
Under the COVID-19 scenario, the Group is expecting to generate FY 2021 revenue of around £272 million, being approximately 80% of the previously budgeted revenues for the year, generating approximately half of the trading profit that was originally forecast in management's FY 2021 pre-COVID-19 budget.
The Board believe a number of further opportunities will arise in Healthcare. Postponed elective surgeries will be carried out and the currently reduced healthcare consumer spending should return towards more normal levels once the current restrictions are lifted. Many healthcare companies will review their extended supply chains, particularly in Asia, which should benefit Scapa as those companies look to on-shore their supply chain. An increase in technology transfer opportunities is expected as companies look to streamline their footprints and product portfolios, to minimise cash expenditure, and to increase o utsourcing in order to leverage partners' resources. Finally, it is expected that there will be an increase in M&A opportunities at more attractive valuations than those experienced recently.
The Industrial portfolio is generally well diversified across both geographies and different industries and has a resilient and non-cyclical portfolio of products. In particular, management believe that COVID-19 will have a minimal impact on its cable segment, which should continue to be strong.
Similar to Healthcare, the Group believes there are a number of key areas within Industrial that could help facilitate a strong trading period post-COVID-19. The r e-opening of retail channels and an improvement within the auto motive industry will provide a return in demand . In addition, there is an opportunity to benefit from on-shoring of Asian supply chains and from e-commerce where the Group could capture market share from a shift in consumer behaviour .
The Board therefore believe that revenue and profits will recover in FY 2022. It is expected that Group revenue will grow by between 5 and 10 per cent. from the FY 2021 level in FY 2022. Trading profit is also expected to grow significantly from FY 2021 with a return to double digit margins, driven predominantly by volume recovery in both businesses, underpinned by the operational leverage and cost reductions across the Group and on-going restructuring in Healthcare.
The Board believe that, should revenue recover more slowly than anticipated, the Company has the necessary levers to protect and drive earnings through further cost optimisation in both businesses, a clear contingency plan that can be implemented and further restructuring, margin improvement and footprint consolidation.
Update on financing arrangements
As highlighted in its COVID-19 update, released on 27 March 2020, the Group has been exploring necessary contingency plans in light of recent COVID-19 headwinds, and Scapa today announces it has received credit committee approval from its existing lenders, Santander, HSBC and Bank of Ireland (the " Lenders " ), for the Lenders to provide a £15 million short-term facility (the " Additional Debt Facility " ) to sit alongside the Group's existing £80 million RCF. The Additional Debt Facility is expected to be available from 1 June 2020 and to have a term of 12 months.
Currently, the Group has two financial covenants on its RCF, the ratio of adjusted EBITDA to net finance charges must be above 4:1 (the " Existing Interest Cover Covenant " ) and the ratio of total net debt to adjusted EBITDA must be less than 3:0 (the " Existing Leverage Covenant " ). Scapa has received credit committee approval from the Lenders for the Existing Leverage Covenant to be temporarily suspended. It is proposed that it will not be tested in September 2020 and will next be tested in March 2021. During the period from the date of the amendment of the existing RCF and commencement of the Additional Debt Facility until the later of the expiry of the Additional Debt Facility and the date on which the Group returns to compliance with both the Existing Interest Cover Covenant and the Existing Leverage Covenant, it is expected that the Existing Interest Cover Covenant will be tested quarterly and two additional financial covenants will apply (the " New Temporary Covenant Tests " ). The New Temporary Covenant Tests, which are tied to the Group's COVID-19 scenario, will apply to both the existing RCF and the Additional Debt Facility. They comprise a minimum EBITDA test (which requires EBITDA to be at least 80% of LTM EBITDA in Q1, Q2 and Q3 FY 2020), and a liquidity test, tested quarterly (which requires available liquidity to cashflow servicing obligations in the next quarter to be at least 1.5:1). Additionally, there is a requirement that capital expenditure does not exceed 110% of the amount forecast in the COVID-19 scenario. The Group has strong headroom against these covenants in the COVID-19 scenario.
The Placing Shares will be offered by way of the Bookbuild, which will be launched immediately following the release of this Announcement, and the Placing is subject to the terms and conditions set out in the Appendix to this Announcement. The timing for the close of the Bookbuild will be determined by Numis, Berenberg and the Company.
The final number of Placing Shares, and the price at which such shares will be subscribed (the "Placing Price"), will be agreed by Numis, Berenberg and the Company at the close of the Bookbuild and the result (together with details of the number of Subscription Shares subscribed for) will be announced as soon as practicable thereafter.
In conjunction with the Placing Heejae Chae, CEO, and Non-Executive Directors David Blackwood, Brendan McAtamney and Tim Miller, as well as certain members of the senior management team of the Company, intend to subscribe for Subscription Shares at the Placing Price, contributing approximately £335,000 in aggregate.
The net proceeds of the Placing and the Subscription will be used to strengthen the Group's balance sheet and provide flexibility to support future growth initiatives post-COVID-19. The Board consider it prudent to take action now in order to withstand the adverse financial impact caused by the disruption as well as to have sufficient resources to support ongoing operations and to p rovide flexibility to capitalise on any potential opportunities in a post-COVID-19 environment .
The Subscription Shares will be subscribed on the basis agreed pursuant to a subscription letter which is intended to be entered into between the Company and the relevant individuals immediately following the making of this Announcement, rather than pursuant to the terms and conditions of the Placing contained in the Appendix to this Announcement.
Rationale for the Placing
Given the uncertainties around the COVID-19 crisis, the Board believes the Placing and the Subscription are in the best interests of all shareholders in order further to strengthen the Group's balance sheet. The Placing and the Subscription represent a prudent move that will protect the business in this period of disruption and provide flexibility to capitalise on any potential opportunities in a post-COVID-19 environment. The Placing and the Subscription are also part of a wider range of mitigating actions that the Group is continuing to take as part of a well-developed action plan in response to COVID-19.
Taking together the impact of the management cost reduction initiatives, the Placing, the Subscription and the Additional Debt Facility, the Group is expecting adjusted net debt of approximately £34 million at the end of FY 2021. Consequently, the Company projects that, following the Placing and the Subscription, the Company's FY 2021 Net Debt / EBITDA ratio will be approximately 1.4x, compared to approximately 2.6x without the Placing and the Subscription.
The Board believes that following the implementation of the mitigating actions described in this Announcement, the Group will have sufficient working capital and liquidity in the event of a prolonged COVID-19-related downside scenario.
Looking ahead, and beyond the current COVID-19 crisis, the Board believe that, following the Placing and the Subscription, the strength of its balance sheet will allow the Group to capitalise on opportunities and provide the Company with a strong financial position to support its growth.
Details of the Placing and the Subscription
The Placing is subject to the terms and conditions set out in the Appendix to this Announcement.
The Joint Bookrunners will commence the Bookbuild immediately following the release of this Announcement. The Placing Price will be determined at the close of the Bookbuild.
The book will open with immediate effect following the release of this Announcement. The timing of the closing of the book, pricing and allocations are at the absolute discretion of the Joint Bookrunners and the Company. Details of the Placing Price and the numbers of Placing Shares and Subscription Shares will be announced as soon as practicable after the close of the Bookbuild.
The Placing Shares and the Subscription Shares, when issued, will be fully paid and will rank pari passu in all respects with each other and with the existing Ordinary Shares, including, without limitation, as regards the right to receive all dividends and other distributions declared, made or paid after the date of issue.
An application will be made for the Placing Shares and the Subscription Shares to be admitted to trading on AIM ("Admission") and it is expected that Admission will become effective on or around 19 May 2020.
The Placing is conditional upon Admission becoming effective not later than 8.00am on 19 May 2020, or such later time and / or date as the Company, Numis and Berenberg may agree (being not later than 8.00am on 2 June 2020). The Placing is also conditional upon, among other things, the placing agreement between the Company and the Joint Bookrunners (the "Placing Agreement") becoming unconditional in all respects and not being terminated in accordance with its terms. The Appendix to this Announcement sets out further information relating to the terms and conditions of the Placing.
The Subscription is conditional only upon Admission becoming effective.
The Company has consulted with the majority of its major institutional shareholders ahead of the release of this Announcement. The Board have concluded that the Placing and the Subscription are in the best interests of shareholders and wider stakeholders and will promote the long term success of the Company. This conclusion has been endorsed by that consultation. The Placing structure minimises cost and time to completion at an important and unprecedented time for the Company.