What is Goodwill Written off?

Cape – Dividend will be held: Buy at 228.5p for a 6.13% yield  December 31, 2014 – 04:20 am

Cape (CIU), the FTSE 250 constituent which provides essential, non-mechanical support services to the energy and mineral resources sectors had a pretty dreadful 2012. On 29th March its CEO Martin May stood down with immediate effect. Six months later we had a repeat announcement, this time it was the FD going. In between the company served up a dismal set of interim numbers, warned of a downturn in trading in Asia and took a £14 million write-off against current and estimated future losses on the Arzew LNG contract in Algeria. Frankly it could get worse. The company has already flagged that given declining margins in its Asian business it could take an enormous hit in terms of goodwill write-offs in the year end numbers as it issued a profits warning on November 12th. It all sounds pretty dreadful which is why the shares are trading at a near year low. As a contrarian investor and a value investor I see this as an opportunity.

What will underlying profits be this year? I suspect no-one really knows. In the half year to June 30th pre0ax profits fell from £34 million to £12 million (although £14 million of that was down to Arzew). In calendar 2011 pre-tax profits came in at £69.4 million (earnings per share of 43.8p). I would estimate that underlying pre-tax profits for calendar 2012 would come in at around £38 million (assuming that corrective actions in Asia have stabilised the ship. But there will clearly be a huge goodwill write off in Asia and thus I expect a headline pre-tax loss.

Source: Trading Research Point

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