German Ifo meets expectations; Taiwan Oct industrial output misses; CRH saw better Q3 growth in Americas than in H1

CRH (CRH LN, £23.0bn) | Hill & Smith (HILS LN, £1.1bn) | Somero (SOM LN, £110m) | James Halstead* (JHD LN, £1.0bn) | Headlam (HEAD LN, £377m) | Coats Group (COA LN, £985m) | Victoria (VCP LN, £527m) | IG Design Group (IGR LN, £510m) | Severfield (SFR LN, £233m)

Coats Group - Termination of coverage

Edison Investment Research is terminating coverage on Coats Group (COA). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.

Coats Group - Building Industrial momentum

FY17 results clearly demonstrate that Coats Group’s industrial operations have good momentum and a transformation plan is to enhance this further over the next couple of years. Group earnings and free cash generation were both up by double-digit percentages in FY17. While partly anticipated in the current rating, we believe that Coats is focusing on faster-growing segments and, having clarified group pension requirements, has the financial capacity to achieve this in a number of ways.

Coats Group - Above market growth

After a robust overall trading update, we have modestly rebalanced our revenue and EBIT estimates in favour of Industrials, Apparel & Footwear with group profit projections unchanged overall. We believe that management is preparing to set out the group’s growth credentials and this may provide further support for a share price that has travelled well since the beginning of the year.

Faster growth aspirations

H117 results provided clear evidence of business momentum with a strategy to accelerate the influence of innovation on future growth rates. Following a series of announcements and the H1 cash flow presentation, the ongoing pension, and therefore group, funding positions are now fully visible. The combination of these points indicates an aspiration to achieve faster group progress, in our view.

Positive signals of progress

Following the latest quarterly review, Coats Group is to enter the FTSE 250 Index with effect from 19 June. As well as signifying a strong share price performance over the last year, this concludes the company’s transition phase to a strong independent entity in our view. Valuation metrics are on a more conventional footing now and as the market’s understanding of the underlying business model increases we sense that it is starting to anticipate faster growth rates.

FY16 ahead, estimates nudged up

A busy year for Coats concluded with progress on earnings and pensions. There is more to be done on both but with pension distractions substantially resolved and good cash credentials there are more strategic options available to management. The valuation has begun to normalise now and the return to dividend payment contributes to this.

Pensions progress and dividend returns

Coats has agreed terms (subject to final settlement) for two UK defined benefit (DB) pension schemes, representing 90% of UK DB scheme liabilities. This clarifies the underlying balance sheet position and ongoing cash profile. Coats retains a strong financial position, with good earnings growth prospects and a likely return to the dividend list from FY17.

Increasing business focus to highlight valuation

Operating performance was more in focus in H116 given relatively lower-level distractions from non-trading items. Underlying margin increases were achieved by both divisions with little overall assistance from markets. Greater clarity on the group pension position – and the implications for future strategic investment and dividend payouts – is edging closer. Valuation multiples are little changed and remain low on P/E and EV bases.

Mixed trading conditions, further pension progress

Trading in the first four months of FY16 largely mirrors management’s balanced outlook comments with the FY15 results, and EBIT guidance is unchanged. We have reduced PBT estimates slightly to reflect the latest pension scheme recovery plan update. Progress in resolving legacy issues is welcome and the large Coats scheme is next to be addressed.

Making progress

Coats Group’s rating does not reflect its global market position, which is being further developed by business investment. The resolutions of legacy issues (chiefly pensions and environmental) have seen some forward steps over the last year and more are expected during FY16. Although the timing and extent of these are still to be determined, they will bring greater clarity to the company’s underlying valuation.

On track for FY15 progress

Recent group trading has been broadly in line with H1, albeit with some variation within the detail. Our estimates are unchanged and will be reviewed again at the year end. P/E multiples remain in single-digits from FY16. We note Coats’ intention to delist from ASX and NZX next year.

Newly independent, seeking growth

Having re-emerged as a newly independent company earlier this year, Coats is well placed to build on its industry-leading position. Prospects may not be fully reflected in the valuation until there is greater clarity on pensions. We contend that business development is not constrained here and – on single digit underlying multiples – Coats offers good value.

Well positioned for future success

Strong performance against tough market conditions

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