A big move to increase exposure to the Footwear market
Coats has agreed to buy OrthoLite a market leader in open-cell foam insoles with a 36% global market share. The acquisition accelerates Coats Footwear division''s strategy to become a ''super tier 2'' supplier in footwear components, strengthening its product offering and improving the overall quality of Group earnings (OrthoLite has generates 28% operating margins). Based on results to 31 December 2024, the enlarged Coats Footwear division has pro-forma revenues of approximately USD700mn vs. our pre-deal forecast for FY25e Footwear sales of USD414mn. Coats targets USDF20mn in synergies and will fund the deal via a combination of new debt facilities and an already completed equity placing of 19.99% of its issued share capital. The deal is expected to complete towards the end of 2025, after which the Company will move to pro-forma net leverage of 2.2x, falling to below 2.0x by the end of 2026.
A small beat on H1 margins; outlook unchanged
Alongside the deal and fund announcement, Coats also published its H1''25 numbers. Group sales beat our estimates by 0.5% and grew at an organic rate of 2.0% (vs. BNPPE at 1.5%). Coats'' margin of 19.9%, +50bps ahead of our forecast driving an adjusted operating profit beat of 3%. FCF stepped up to USD54mn (vs. USD39mn in H1 24), driving net debt down to USD430mn. The Group''s full year outlook remains positive and aligned with market expectations.
Updating numbers to reflect the OrthoLite transaction and recent trading
We move to model the OrthoLite transaction. We assume the deal completes at the beginning of Q4. We model the initial costs of the deal and subsequent spend on integration/ cost savings. We model the USD20mn of communicated synergies to accrue over the three years to the end of FY27e. We estimate that Group net debt will now end the year close to USD850mn and that the Group''s share count will rise to c. 1,930mn. Our SOTP26e based target price...
