Shares in bonding solutions and adhesives group Scapa (AIM:SCPA) are trading down 45% to 162p, following an announcement that the company has received notice from ConvaTec (CTEC) terminating a ‘Material’ 5-year Master Supply Agreement (MSA) with Scapa Tapes North America.
SHOOT FIRST, AIM LATER
ConvaTec has filed a legal action in a federal court in New Jersey, effectively asking the court to clarify the company’s legal rights and obligations, in a so called ‘declaratory judgement’. These are common in patent litigation cases and other areas of intellectual property cases.
Today's market reaction implies that investors fear Scapa will suffer reputational damage to its business, perhaps impacting other supply contracts, although that is unclear at this stage.
WHAT IS THE LIKELY ECONOMIC IMPACT?
The agreement has three years remaining and is thought to be worth around $30m a year to Scapa, although the company has so far not assessed the profit implications and will update the market in due course.
The contract is worth around 8% of global revenues, which means that the forecast growth in turnover for the year ended 31 March 2020 will be effectively wiped out by this announcement.
A loss of revenues will be magnified at the profit level too, because the business is operationally geared, with relatively high fixed costs.
Analysts at Berenberg say they expect to downgrade earnings forecasts by around 20%, although this is subject to more financial detail coming from the company.
