CAPE faces a protracted legal battle with claimants
Companies: CAPELLI
Industrial services provider Cape Plc's share price fell 14% this morning as the company warned investors that it might have to cut its dividend and pay out up to £10m for potential claims if it loses its ongoing legal battle regarding industrial diseases.
The update came alongside a trading update that showed the company performing relatively well, with full-year results expected to be slightly ahead of expectations.
The AIM-listed firm delivered solid results, with current trading in-line with expectations and full-year results expected to beat expectations, primarily driven by improved performance in APAC and translational benefits of current forex rates.
The improved results in APAC and favourable forex offset margin pressure and lower demand in the UK and the Middle East, but despite challenging conditions in its markets, the company said its prospects for 2017 were encouraging.
"While the outlook for the markets in which the Group operates remains uncertain, prospects for Cape in 2017 are encouraging. The delivery of the Group's strategy continues to provide resilience and the opportunity for growth despite the current challenging market conditions."
UK market conditions have proved challenging for the firm as some clients have deferred discretionary spending and pursued cost saving programmes, meaning the business in the UK has suffered margin pressures throughout the period, and lower demand for its specialist services.
In the Middle East, the group suffered from a sustained lower oil price which has forced clients to look at cost reductions in their respective businesses. However, as mentioned above, this was offset marginally by strong performance in Azerbaijan and Qatar.
Update on insurer EL industrial disease claims
More significant than the trading update was today's announcement on its ongoing litigation case regarding industrial disease claims. The company has previously said it would appeal several aspects of the judgment and have allocated nearly £10m for potential claims.
CIH has been given the right to appeal against most of the issues it had sought to appeal, and Aviva Plc was also granted the chance to cross-appeal. Frustratingly for investors, the hearing won't be held until the middle of next year (25/26 July 2017).
What industrial disease claims is Cape facing?
The company first announced in its 2015 prelims that it would face a 6 week trial regarding "a number" of product liability claims, the date of which has now been set at 16 January 2017. The company is confident of its case, but has stressed that there is increased risk on the Cape brand and companies:
"The Board remains of the view that the Insurer PL Claims place very substantial evidential burdens upon the claimants, the merits of our defence are persuasive and no provision is currently required. The Company will therefore continue to vigorously defend these claims.
However, due to the emerging complexity of this litigation, the Board believes that there is an increased risk that the litigation could have an adverse impact on the Cape Scheme, and in turn upon the Cape group of companies."
Frustratingly for investors, the Group's potential liability "cannot be accurately estimated at this time" and it is possible that the appeals process will be drawn out, leading to further uncertainty for Cape. As mentioned earlier, the company has set aside £10m for claims.
What if Cape loses?
If Cape loses the litigation, it could have "material and continuing" impacts on the group and its stakeholders and ultimately could lead to the group having to cut its dividend:
"...it may also have material and continuing impacts on the Group and its stakeholders including but not limited to impacting the implementation of the Group's strategic plans, potentially including the Company's capacity to pay a dividend."
The company's share price fell 14% in early trading as the market priced in the ongoing litigation.
