Research that is free to access for all investors. Companies commission these providers to write research about them.
Brokers who write research on their corporate clients and make it available through our main bundle offering.
Research that is paid for directly by asset managers. Only accessible to institutional investors permissioned for access.
Event in Progress:
View the latest research on other companies in the sector.
Acquiring Ortholite expands Coats’ Footwear business, accelerates growth, and improves margins and FCF. Coats is performing well despite tariffs and should gain further share from supply chain adjustments. The valuation is compelling, in our view, given the strength of FCF generation and attractive returns. We reiterate our Buy rating and 125p TP.
Coats Group plc
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...
This transaction expands Coats’ Footwear business, accelerates growth, and improves margins and FCF. Coats continues to perform well despite tariffs and should gain further share from supply chain adjustments. We believe the valuation remains compelling given strong FCF generation and attractive returns. We maintain our 125p TP and Buy rating.
First half results on 31st July Coats will report H1 results on 31st July. Over the last 12 months Coats shares have underperformed significantly, especially since growth momentum stalled around the year-end. The shares have derated and now trade on just 8.3x EV/EBITA26e, a 40% discount to the Sector, which we continue to view as unwarranted. We may have to wait for a better top line, but reassurance on tariffs can help the shares The shares fell around the time of ''Liberation Day,'' and with a business model that leans heavily on production in countries such as Vietnam, investors appear to be waiting to see whether there is a future tariff-driven impact to sales growth and margins. An in line H1 print and confirmation of an expectation for ''Consensus like'' H2 margins could reassure and so offer the shares some support. Expecting an in line top line print and solid progress on margins - 20% now in sight We expect limited progress in respect of organic sales growth during Q2, but anticipate a strong YoY margin progression, partly thanks to the Group''s recent exit from its US Yarns business. At 19.3%, if achieved, our first half Group margin forecast would represent a record level for this portfolio, with potential for profitability to rise above 20% when volume growth accelerates. First half FCF and net debt should be close to market expectations. We adjust our estimates for latest trading and FX; TP 100p We adjust our numbers to reflect recent trading, the outlook and FX. Since the Q1 trading update the USD (Coats'' reporting currency) has weakened, however, Coats'' FX effects can be hard to estimate; we understand that there is little to no FX tailwind to Consensus from mark-to-market FX estimates. Our TP remains 100p; we are Outperform rated.
Slower topline growth... First quarter Group organic revenue growth came in at 4%, compared to our forecast of 5.6% for H1 (no Consensus), with Apparel delivering 5% organic revenue growth; Footwear 5%, and Performance Materials (ex-Yarns) 0%. Within this, we believe that China was a little weaker, likely due to tariff related uncertainty, while other territories such as Vietnam, Indonesia and Central America were stronger. Apparel benefited from customers higher preference for premium threads, while Footwear was impacted by weaker demand from luxury brands. We understand that momentum within Coats'' recycled threads business remains strong. Coats appears cautious with respect to sales growth during the final couple of months of H1 trading. While absolute revenue should remain at recent levels, tougher comps will likely cause YoY growth to slow. ...but margins rising faster than expected The outlook for margins has improved, thanks to portfolio actions and internal actions. The Company now sees a first half adjusted EBIT margin within its medium-term target range of 19-21%, supported by the exclusion of the soon to be exited US Yarns business which likely has a positive margin impact of c. 60-80bps (deconsolidated from January 1st), and internal actions on price, procurement and productivity which should deliver a further 80bps. Updating estimates; TP to 100p p/s (from 105p p/s) We cut our sales growth forecasts for the rest of the year. We now model Group organic sales growth of 2.3% in FY25e. Simultaneously we move to model a higher FY25e margin of 19.5%. Our target price moves down slightly to 100p, a reflection of a lower FY25e SOTP-based target price multiple which we now see the market assigning to Coats given its expected lower topline growth rate.
In the short term, there is likely to be weaker consumer demand. We make a small reduction to forecasts (c.3%) to reflect this and the sale of US Yarns. This should not deflect from the longer-term opportunity to deliver strong earnings growth, ROCE, and FCF. Buy, TP of 125p.
Coats has issued a Q1 trading statement for the four months to 30th April, key takeaways include... Group organic revenue growth came in at 4%, compared to our forecast of 5.6% for H1 (no Consensus), with Apparel delivering 5% organic revenue growth; Footwear 5%, and Performance Materials (ex-Yarns) 0%. Within this, we believe that China was a little weaker, likely due to tariff related uncertainty, while other territories such as Vietnam, Indonesia and Central America were stronger. Apparel benefited from customers higher preference for premium threads, while Footwear was impacted by weaker demand from luxury brands. We understand that momentum within Coats'' recycled threads business remains strong. In terms of guidance, Coats appears cautious on the final couple of months trading in H1. While absolute revenue should remain at recent levels, tougher comps will likely cause YoY growth to slow. We now see Consensus moving lower for H1 organic sales growth, from c. 4% to 2%, implying no growth in the final two months to June. Growth is still expected for FY25e, implying a reacceleration from May-June levels of growth will be needed. FX is set to have a c. -2% impact on H1 sales. At current exchange rates the FY25e impact is likely to be c. -1%. The previously announced sale of Coats'' US Yarns business will now drive deconsolidation from 1st January 2025. Not all of Consensus fully reflects this change. Roughly speaking it should reduce annual revenues by c. USD68mn and adjusted operating profits by USD3mn. While management''s message on sales growth may drive a small cut to Consensus revenues, the outlook for profitability is more upbeat. The Company now sees a first half adjusted EBIT margin within its medium-term target range of 19-21%, supported by the exclusion of Yarns which likely has a positive impact of c. 60-80bps, and internal actions on price, procurement and productivity which should deliver a further 80bps. We would therefore expect...
Management has moved to resolve the underperforming US Yarns business, which should improve focus and margins. The shares are highly attractive in our view, trading on c.10x FY25E PE and 7x EV/EBITDA, given the company’s market leadership, impressive margins and high returns. We reiterate Buy, TP 125p.
Strategic exit from non-core US Yarns operations in Q2''25 Coats Group has announced plans to completely exit its US Yarns business based in North Carolina, which sits within the Performance Materials division. This follows a strategic review initiated in late 2024, which previously led to the shutdown of the Toluca site in Mexico. The review has concluded that the segment no longer aligns with Coats'' strategic priorities. We understand that after testing pricing, management concluded that the US yarns business lacked sufficient profit potential, prompting this decision to exit and refocus on a more streamlined and profitable remaining set of businesses. The exit process is expected to be completed in Q2''25. Positive margin impact, modest cash inflow expected The exit will result in a modest net cash benefit in H2''25, even after accounting for related closure expenses. Additionally, this divestment should be accretive to EBIT margins for both Performance Materials and the Group given that in FY24, revenue for US Yarns was $68m and EBIT was $3m. Management anticipates that exiting this non-core operation will allow for greater focus on expanding other strategically aligned and higher-value segments within the Company''s portfolio. With Coats'' shares down -18% YTD, partly we believe on concerns as to the ultimate solution for this asset, we think today''s news should offer some clarity, which may ultimately support the shares. We adjust our estimates to reflect this transaction; O/P rating and 120p TP maintained We update our numbers to account for this transaction and recent changes in FX. There are small downgrades to FY25/26 Group Revenue and EBIT. Our adjusted operating profit margins for Performance Materials move +40/110bps for FY25/26 and for the Group +30/60bps for FY25/26. Our TP remains 120p; we remain Outperform rated.
We have adjusted our estimates to reflect lower forecast organic sales growth, with a small commensurate impact to margins. We have also slightly adjusted our interest charge. We do not consider the changes to be material; our rating is unchanged.
Another half of healthy sales growth Coats reported sales of USD 760mn in H2''24, +1.8% vs BBG consensus. Group organic sales growth accelerated from 8% in H1 to 10% in H2. Coats stated back in November that the Group grew at 11% CER in the four months to the end of October. We estimate that growth slowed a little to around 9% in the final two months of the year. Coats achieved an adjusted operating income of USD137mn in H2 (+1% vs BBG Consensus). Full year adjusted FCF rose to USD153mn. Outlook in line with Consensus The Company issued the following message in respect of the coming year. ''Based on current market conditions and normalised customer buying behaviour, we anticipate another year of financial and strategic progress in 2025, in line with market expectations.'' Consensus currently models sales growth of c. 5.5% in FY25e and an adjusted operating margin of, or slightly above, 18%. Coats issues new financial targets - 20% margins loom large Within our 2023 results wrap we showed how a 20% margin was possible for Coats. Now, a year later, management has issued fresh medium-term Group targets. The Firm now aims for a future revenue CAGR of 5% pa and an adjusted EBIT margin of 19% to 21% (from the FY24 level of 18%). Additionally, the Firm expects to generate USD750mn of cumulative adjusted FCF (after interest and tax, but before the dividend) over the next five years. Management targets an EPS CAGR of 10%, supported by organic sales growth as well as either (or both) buybacks and acquisitions. Towards the end of this note we offer some scenarios for how these targets can be achieved. In our view... 20% margins loom large and Coats could deliver cumulative adj. FCF of USD1bn by 2029. We adjust our estimates for latest trading; TP 120p We adjust our numbers to reflect recent trading the outlook and FX. Our TP remains 120p; we remain Outperform rated.
A clear vision – Coats continues to take share, grow sustainable products, and has set a clear vision for profits and cash delivery. The rating is compelling for a market leader with strong growth drivers. We reiterate our Buy rating and 125p TP.
Strong Group organic sales growth was led by Apparel and Footwear Group sales grew at an 11% organic rate in the trading period (1st July to 31 October) while lapping a prior year comparator of -12%. This compares to our estimates of c12% (no Consensus). With YTD organic sales growth tracking +9%, we believe Coats should comfortably meet FY Consensus organic sales growth expectations of +8%. The growth across Apparel and Footwear (AandF) was robust at c14%, in line with our estimates, while the development in Performance Materials (PM) was more subdued (+1% YoY) and below our (and Management''s) expectations. Coats attributed the slower PM recovery to lower order book activity in the personal protection (yarns business) and composites sectors (related to Telecom), mainly in the Americas. Within the release, Coats notes that lower capacity utilisation in the Americas continues to negatively impact PM margins - which to our minds implies that PM''s margin deteriorated sequentially from already depressed levels. Outlook was reiterated; with the core Apparel and Footwear business performing strongly Coats has reiterated its outlook message. It is confident that the good momentum in AandF can be sustained in Q4 and that its adjusted operating profit margin can come in at ''around 18%''. This is despite weaker than anticipated trading in PM, which we think suggests that profitability in its core, higher multiple AandF division will be a little better than Consensus envisions. It should also be noted that weakness in PM is not broad based but rather isolated to its Yarns business, an issue we suspect will be high on the agenda of Coats'' new CEO David Paja. We would not rule out more aggressive actions at this early stage. We update our forecasts for latest trading; O/P rating and TP reiterated Our Group forecasts remain largely unchanged. Modest downward revisions to PM are offset by modest upward revisions at AandF. We reiterate our Outperform rating and 120p price...
Sales are improving as destocking ends, Coats gains share, and margins are well ahead of the initial guidance of 17%. The shares are excellent value on 12.6x PE and 8x EV/EBITDA to December 2025E, in our view. We maintain our target price of 125p and Buy rating.
The shares have performed well (+24% YTD), but are still only on 14x FY24E PE, which looks low for a global market leader, with strong ROCE and FCF and excellent growth prospects. We reiterate Buy, TP 125p.
This marks the conclusion of funding the UK schemes and fully de-risks the liabilities. This is an important step in simplifying the investment case and ensuring the business is valued as a global market leader with good growth prospects and attractive returns. Reiterate Buy, TP 125p.
Coats announces the final de-risking of its UK pension scheme Coats Group has announced that the trustee of the Coats UK Pension Scheme has purchased a c. GBP1.3bn bulk annuity policy. This buy-in covers the remaining 80% of the scheme''s liabilities not covered by the buy-in of December 2022. The agreement requires up to c. GBP100m of additional funding from Coats. The funding will be provided in the form of a GBP70m upfront cash contribution as well as a further GBP30m provided initially as a loan. The loan is required to provide the scheme with cash until certain long-term assets are realised and includes advance provision for other exposures. How much of the loan will be recoverable is uncertain, however we understand that additional costs are highly unlikely to exceed the GBP30m provided. We prudently assume none of it is recoverable. The buy-in safeguards a richer FCF margin profile Coats'' pension has long acted as a drag on the equity story and for good reason. Over 2018-2023 we calculate that cash costs associated with the pension acted as c250bps drag on FCF margin (c$30m per year) and back in 2017 Coats had to make a large cash injection (cGBP290m/$370m). While Coats had been able to temporarily switch off payments in January 2024, on account of the pension moving into a surplus on a technical provision basis, this latest action removes the risk of top-up or catch-up payments having to be made in the future. As such, Coats have effectively safeguarded a much richer FCF margin for its foreseeable future. How much value might be created? On our estimates, Coats'' buy-in is value neutral if its ''25 EBIT multiple moves up by c0.3x; if Coats re-rates by a whole turn nearly c15% of value could be generated. We think a re-rating is very much justified; Coats has drawn a close to the pension saga that has weighed considerably on the equity story over the last few years (although admittedly less at present). Further, the full resolution safeguards a richer...
Coats'' H1''24 conference call has just concluded, the key takeaways for us: Apparel and Footwear volumes: Coats see a continued improvement in volumes as we travel through H2''24 that builds in H1''25 (Q4Q3Q2; H1''25H2''24) which was reassuring. The key takeaway is that the outgoing CEO expects a return to a 2019 baseline in 2025 (perhaps by as early H1''25). This is quite material, as we estimate that Consensus today models ''25 volumes that are c.8% below 2019 levels. Therefore, potential upside to Consensus'' FY''25 adjusted operating profit estimates, if one assumes a return to 2019 volume levels, might be c.8-10% on 25-30% operating drop through assumptions. Performance Materials: PM''s margin has been soft in recent years and in H1''24 stood at 8.3% but volumes are weak (H1''24 c.20% below ''19 levels) and Coats'' are grappling with dual running costs associated with facilities in the Americas (US and Mexico). In terms of when margin might reach its 13-14% target, the outgoing CEO noted that many rests upon volume recovers to that 2019 baseline, with a recovery expected by the end of FY''25. This suggests to us that 13-14% margin may be possible by FY''26. Pension: The CFO noted that it doesn''t need to wait for the triennial valuation adding that the insurance market is busy, and that pension trustee work has put Coats in good position. With it getting good engagement from insurers Coats is hopeful that it will have news to share with the market in H2''24. Net-net: Overall this was a reassuring call. Momentum continued to improve in H1''24 and Coats expect to build on this in H2''24 and in H1''25 with a return to 2019 volumes early than is implicitly reflected in Consensus expectations, implying that risk-reward to estimates as this recovery continues to gather steam is to the upside. Full conference call notes Outlook . H2 sales: More challenging comparatives. QoQ improvement in absolute sales numbers so far and expect that to continue into...
Sales are improving as destocking ends and Coats gains share, and margins are ahead of expectations. The outlook is encouraging and the shares are excellent value in our view on 12x PE and an 8% FCF yield to Dec 2025E. We increase our TP to 130p to reflect the higher forecasts and reiterate Buy.
1H24 sales come in 2% ahead of expectations with momentum improving through H1 In H1''24, Coats recorded sales of USD 741m, +2% vs VA Consensus, and grew at an organic rate of 8% YoY (VA Cons: 6%). Given that organic sales grew at a 7% rate in the first four months of H1, we believe that this implies sales grew at c.10% in the last two months of H1. Within the mix, we estimate that Apparel grew at 14% rate in the last two months (similar to the first four months) while growth at Footwear accelerated to c9% (from 6%). Even Performance Materials which delivered a softer H1 (-3% organic performance) was able to grow in the last two months of the half (albeit marginally). Market share gains were thought to have supported all businesses. Adjusted operating comes in 3% ahead of the Street but supported by an FX gain Adjusted operating profit of $133m came in 3% ahead of VA consensus with margin of 17.9% (+290bps YoY) coming in c20bps ahead. A stronger performance in Apparel and Footwear (margin +280bps YoY) supported by an FX gain of c$3m was able to offset a more underwhelming Performance Materials (margin -80bps YoY) print where under absorption of fixed costs weighed (c$4m drag). Adjusting for the FX gain, Group adjusted operating profit would have come in c1% ahead of expectations and margin would have missed marginally (-20bps). Coats now guides to profit above market expectations implying an upgrade of c2% Coats now guides to a full year performance ''modestly above current market expectations''. If we interpret guidance to mean management expect FY24 profit at the top of the current consensus range (c. USD 266m), this implies FY''24 profit upgrades of c. 2%. Stripping out the FX gain the underlying upgrade is c1% (with an implied H2 upgrade of c1% too). We adjust our estimates for latest trading; TP moves up to 110p (from 105p); O/P reiterated We nudge our estimates slightly higher following the H1 release. Our TP moves up to 110p (from 105p) to...
Coats has performed exceptionally well during a period of weak consumer demand and industry de-stocking. The business is well placed to show stronger organic growth and deliver higher margins. We increase our TP from 103p to 125p to reflect the upside opportunity and reiterate Buy.
A strong act to follow – Coats has been transformed during Rajiv’s time at the business, with margins improving from 7.8% to >17% in the current year. The business now has a stronger position with key brands, a reputation for innovation, and a strong lead in sustainability. Over his tenure the shares have risen by close to 3x. Reiterate Buy, TP 103p.
Rajiv Sharma decides to step down as CEO; David Paja announced as replacement Coats Group has just issued a press release announcing that Rajiv Sharma will step down from his position by the end of the 2024 after eight years as CEO and 14 years with Coats. He will be replaced by David Paja, most recently CEO of GKN Aerospace. Paja is expected to become an executive director on 1 September 2024 and will assume responsibilities from Sharma on 1 October 2024. Sharma will remain available to the Board and David until the end of the year. Sharma leaves Coats in a strong position having driven significant transformation Over his tenure, Rajiv Sharma has focussed the Group''s exposure on industrial threads, disposed of its underperforming textile crafts businesses and built out its footwear offering. These changes, alongside two restructuring programmes, have driven an improvement in Coats'' EBIT margin. In ''23 Coats delivered a peak margin (16.7%) despite volumes being near trough levels. Such strong performance means we are disappointed to see him go but reassured that Coats have an orderly succession plan in place as the Group shifts from transformation to a phase of profitable growth. David Paja brings wealth of industrial experience Rajiv''s replacement, David Paja, acted most recently as CEO of GKN Aerospace between August 2021 and October 2023 where he oversaw a step up in margin from c. 5% to c. 12%. Prior to GKN Aerospace, Paja started his career at Valeo and went on to hold senior leadership positions at Aptiv and Honeywell. Paja brings a strong track record of delivering profitable growth as well as experience integrating acquisitions within industrial B2B businesses. No change to strategy; we expect continuation of strong performance through FY24 We anticipate no major changes to Coats'' strategy. After a strong Q1 update last month, we expect a continuation of the recovery in Coats'' end markets to underpin record profitability levels through the...
The performance YTD improves our confidence in the full-year outcome. With end-market demand improving and stock levels normalising, we see potential for significant improvement in margins. We continue to view the valuation as compelling, particularly given the c.8% FCF yield.
Improving trends – The destocking period is now largely over, and Coats is showing revenue improvement, helped by its position with key customers, market share gains, and sustainability lead. Although the shares have performed well, the valuation continues to look compelling to us. We reiterate Buy, TP 103p.
Group sales grew by 7% organically; Apparel and Footwear drives the strength Group sales grew at a strong organic rate of 7% YoY in the four months to April 30th (no Cons; BNPPE 1%); we think pricing was flattish. The Apparel business traded well (+14% YoY) while Footwear also displayed better momentum with it returning to growth (+6% YoY). Strength in Asia drove the better performance in both businesses. Performance Materials still acted as a drag (sales -5% in Q1 but even then, this was better than the -10% we anticipated). Overall, we are encouraged by the better momentum displayed in Q1. The early indications of a recovery seen back in Q4 have clearly been confirmed. We calculate that volumes across Apparel and Footwear were c9% below a 2019 baseline, which compares to -15% in Q4. Should one assume that volumes remain c9% below a 2019 baseline across the remaining eight months of the year, then organic sales growth of c10% might be possible across Apparel and Footwear, where Consensus currently models +5%. Guidance reiterated but now looks very well underpinned Coats has reiterated its outlook message for a gradual topline recovery but now no longer calls out a H2 weighting which suggests that it now likely expects growth to be balanced across the year. It still expects to at least deliver a 17.0% headline profit margin (16.7% in FY''23; 18.5% in H2''23; Cons at 18.0%). While Coats has reiterated its guidance, some investors will conclude that it may be erring to the slightly too cautious side (which is understandable given it is early in the year). Afterall, one would now need to assume a deterioration in the current business environment to arrive to Cons. forecasts. For instance, to arrive to Consensus AandF organic sales growth forecasts (+5%) one would have to model growth of c3% across the remainder of the year (which in turn requires one assuming volumes are -14% below a ''19 base across the remainder of the year) which seems too cautious. We...
Coats’ recent final results confirmed that reduced inventory destocking headwinds during the second half of 2023, combined with a higher than anticipated contribution from strategic projects, pricing gains and synergy delivery resulted in adj. EBIT of $233m versus our $233.6m forecast. Despite the
H2 sales below Consensus, however, exit rate in Apparel and Footwear business encouraging H2 sales of $678m came in 5% below Visible Alpha Consensus expectations. On an organic basis sales were in line with expectations (c-10%). Encouragingly, sales in both Footwear and Apparel displayed better momentum as we travelled through the half; PM remained a considerable drag. We estimate that sales in Apparel grew by c3% in the final two months of the year (-5% in the first four months of H2) while Footwear sales were roughly flat in the last two month of ''24 (-18% in the first four months). The better momentum and exit rate out of 2023 should comfort the market. Coats delivered a record margin in H2''23 that is comfortably above what it targets in 2024 Despite volume weakness Coats delivered a record H2 margin of 18.5% (+440bps YoY; +350bps HoH, 60bps ahead of Consensus expectations). Self-help measures acted to provide considerable support. We note Coats delivered better than guided to strategic project savings ($16m in H2 v $9m guide) and productivity benefits ($16m v $8-13m guide). The delta on these line items relative to the mid-point of guidance was $12.5m in H2''23. Coats has adopted an understandably conservative stance with its outlook Coats guides to a gradual recovery that is weighted towards H2''24 and is confident in delivering its 17% adjusted operating profit margin target (given it was comfortable above that in H2''23). While we think the message may catalyse c4% Cons profit downgrades we conclude that it is conservative. Within we show how Coats is not assuming a sequential improvement in momentum from the Q4 exit rate. In any case, margins are at peak with volumes c17% below ''19 levels. We think Coats may be able to generate a 20% margin (calcs within) when volumes recover to their ''19 baseline. We adjust our estimates for latest trading; out TP and O/P rating remain unchanged The lower FY''23 base (inorganic driven) and a more cautious...
FY23 was a year of strong progress, with margins particularly impressive given the volume trends. The outlook is encouraging and the shares are excellent value, in our view, on 10x PE and an 8% FCF yield. We reiterate our Buy rating and 103p TP.
Improving margins and cash – there has been a significant uplift in margins despite weak volume trends. There will now be a far higher cash conversion rate post the pension fund agreement. The shares trade on just 10.1x 2024E PE. We reiterate our Buy rating and 103p TP.
While the value creation process at Coats remains in transition, the agreement to switch off pension deficit repair payments from the 1st January next year represents a significant step forward in the pension fund de-risking process, which is positive for equity holders. We make minor revisions to
Coats has announced agreement with its Trustee to switch off deficit repair payments Coats has announced that it has reached an agreement with the trustee of the Coats UK Pension Scheme to switch off pension deficit repair payments from 1 January 2024. To do so the company has agreed to pay a lump sum payment of GBP10m ($12.6m) to move it into an expected surplus position against the technical provisions funding basis and enable the switch off threshold to be ''comfortably'' met. What does it do the FCF profile of the Group? Coat''s pension has acted as a material drag on FCF over the last decade. As we show overleaf the cash costs associated with the pension has diluted FCF margin by c250bps on average of the last five years. The agreement results in a GBP2m cash saving a month and the deficit repair payments will remain switched off so long as the schemes assets remain above 99% of its technical provisions. The move by Coats equates to a c150bps uplift to our FCF margin forecasts in FY24-25 and on our new forecasts we show how Coats would generate a FCF margin that is slightly richer than that of the Cap Goods sector by 2025. An attractive proposition for a company that trades at a 45% 12m fwd E/EBITA discount. A step in the right direction, even if the pension issue is not fully resolved just yet As Coats have not announced a full buy-in some investors may question whether there is a risk that deficit falls back to a 99% funding level (inflation risk, interest rate risk, longevity risk). However, Coats has been able to improve its hedging rate to over 90% (from 70% in 2017) which partially mitigates interest rate and inflation risk. Coats'' annual report notes that the UK scheme policy also requires low leverage to maintain strong liquidity, partially mitigating risk five. Updating our numbers for the announcement; TP tweaked higher to 100p While not a full resolution, this is a step in the right direction that yields a real FCF margin benefit in...
Additional funding – This agreement releases additional funds for the company to accelerate performance and shareholder returns. The FCF yield improves from 6% to 9%, demonstrating the strength of the underlying FCF. We reiterate our Buy rating and 103p TP.
Coats’ recent trading statement confirmed that customer inventory destocking headwinds have reduced since the first half of the year, leading to organic CER growth of -12% in the 4-mths to the end of October, compared with -19% in H1 24. The combination of trading trends, including signs of a gradu
On the front foot – We expect FY23 profits to be similar to last year despite the volume reduction, which demonstrates the strong performance on margins and scale of self-help. This means that there is significant upside potential when volumes recover. We reiterate our Buy rating and 103p TP.
Sales in H1 declined at 19% organic rate but declines levelled out in Q2 Sales in H1 declined at an organic rate of 19% (BNPP -16%) and were impacted by harsh destocking trends (particularly acute in Apparel and Footwear) and a lost contract in Performance Materials (known about in Q4''22). We calculate those volumes in Apparel and Footwear declined by c18% in the last two months of H1 relative to 22% in the first four months of H1. The lack of a deterioration implies to us that volumes have troughed. While the near-term (i.e H2) shape of the recovery remains uncertain we continue to expect a recovery to ''19 levels by the end of ''24E. Coats'' margin was stellar despite unprecedented volume weakness Despite the unprecedented volume weakness adjusted operating profit margin stood strong at 15.0% (only -60bps YoY but +90bps HoH and +30bps YoY on a PF basis). The strong margin in H1 was supported by continued strong price/mix, cost savings (where guidance was upgraded again) and raw material and freight beginning to act as a tailwind (a dynamic which we believe has further to run). A simple theoretical exercise where one adds back the lost volumes relative to ''19, indicates that Coats today is capable of generating a 17.8% margin (calcs within the note) and this is before one considers incremental cost savings yet to come - which we find encouraging. Coats'' outlook implies 5% Cons. downgrade but is likely conservative Coats guides to adjusted operating profit that is closer towards the lower end of Cons. expectations ($140m) which would imply cuts of c.5% to FY''23 profit. However, guidance assumes no meaningful recovery in volumes (or uplift from destocking ending) or cost tailwinds. It is safe to say that it is prudently struck. We show how a rosier outcome that doesn''t imply as much risk to FY''23 estimates might be possible. Furthermore, the strong H1 margin performance, underpins our confidence in Coats'' ability to deliver a rich margin in...
Robust 1H – we take confidence from the market share gains (c.100bp) and margin performance against a background of destocking. Coats is well positioned to benefit once demand reflects the robust end markets.
Outlook – Market conditions are challenging currently, but Coats is mitigating this through share gains, pricing, cost reductions and acquisition synergies. The shares look good value on 11.4x PE and 7.2x EV/EBITDA given the potential for material upside as de-stocking completes.
Short- and long-term concerns about Coats'' investment case are fading Coats'' UK pension scheme has long acted as an overhang to the equity story. However, recent de-risking actions mean such headwinds may soon dissipate. Further, concerns about the current destocking cycle should also be lifting. Our detailed analysis of inventory levels through the supply chain indicates that we are nearing the end of this destocking cycle, with Q1 likely to mark the last painful quarter, which should allow the market to focus on the inflection in volumes to follow. Despite some scepticism, richer medium-term organic sales growth targets appear credible While the Street appears comfortable with Coats'' margin guidance, it is more sceptical of its medium-term organic sales growth target (6%), a growth rate that we believe is achievable. 75% of Coats'' sales (Apparel; Performance Materials) have already proven that they can grow at their targeted ranges. Therefore, Coats'' ability to deliver on its target 6% organic sales growth rests on the newly created Footwear division, expected to grow at c. 8%. Recent transformational deals should allow Coats to gain market share in what is a structurally faster-growing market, bringing 8% footwear sales growth within reach. Elsewhere, we believe Coats'' recycled thread offering could drive richer Apparel growth than Coats currently targets - we show how 5% could be achievable. Consensus adjusted operating profit expectations appear too low; we stand 5% ahead Having undertaken a detailed analysis of the FY''23-24 EBIT bridge, we conclude that Consensus has taken an overly conservative view on cost items that should act as a tailwind (raw materials and freight). After accounting for (guided) productivity and project-related savings, we calculate that one must assume a negative contribution from incremental volumes to arrive to consensus FY''24 profit expectations. We believe this is too harsh. We stand 5% ahead of Consensus...
Coats has traded in line with management’s expectations during the first four months of the year. Resilient margin delivery, the impact of strategic projects & cost control are helping to offset the anticipated industry destocking during the period, supporting our thesis that the value creation
Outlook – Market conditions are challenging currently, but Coats is continuing to perform well; helped by share gains, cost reductions and acquisition synergies. The shares continue to look compelling value on 11.4x PE and 7.3x EV/EBITDA. We reiterate our Buy rating and 103p TP.
Outlook – Market conditions are challenging currently, but Coats is continuing to perform well helped by share gains, cost reductions and acquisition synergies. The shares continue to look compelling value on 11.6x PE and 7.4x EV/EBITDA.
Encouraging progress – Coats has had a strong year despite the downturn in economic conditions and forex headwinds. This has been delivered through impressive market share gains and proactive measures to improve margins. The recent acquisitions are bedding in well and adding to growth prospects. We make no changes to our FY23E forecasts, but have greater confidence in the outlook. The shares continue to look compelling value on 11x PE and 7x EV/Ebitda.
We expect Coats to manage a period of weaker end market demand in apparel & footwear and to deliver additional savings to maintain/increase margins on top of the US$50m already announced. The rating already reflects the market conditions and we believe there is potential for a material improvement in cash generation if the pension deficit reduces further.
Material progress on the pension The trustee of the Coats Pension Scheme has purchased a bulk annuity from Aviva, which insures c.20% of the scheme’s liabilities. This de-risks the scheme and reduces potential exposure and volatility. Just as importantly, the scheme’s Technical Provision deficit is expected to have reduced to £25m-£30m post the buy-in from £193m at March 2021. The next triennial takes place at March 2024 and there is a real prospect that the company will no longer have to make pension recovery payments even before then (assuming agreement with the trustee). This increases the potential upside scenario for Coats given that the current Technical Provision equates to c.12% of EV and pension recovery payments are c.25% of FCF. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Trading update: In line with FY expectations Organic sales growth was 6% in the 4M to end-October, slightly ahead of our 2H forecast of 5%. The company stated that it is trading in line with FY profit expectations, despite slightly higher FX. We continue to see Coats as well placed to manage inflation, as well as gain share, due to innovation, sustainability and near-shoring. The company also large potential for self-help, which should drive both margins and earnings progression. The shares have recovered recently, but still trade on 8.6x PE to December 2023E and 6.7x EV/EBITDA (including the pension deficit). Charles.Hall@peelhunt.com 2-page note
On the front foot Coats delivered a very well presented CMD on the footwear segment on Tuesday. The overall message was an increase in mid-term sales expectations to a 6% CAGR and a target operating margin of c.17% (vs 13.3% last year). This is being driven by the stronger growth opportunities in footwear, combined with the benefits of the strategic projects and synergies from the recent acquisitions. Coats is now the leading player in the attractive footwear segment, with material advantages of scale, as well as a track record of innovation and focus on sustainability. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 10-page note
CMD today & update Coats is hosting a CMD on its footwear segment today, which accounts for c.30% of Apparel & Footwear sales and 23% of group sales. Here is the link for registration. The company’s guidance for the segment is for mid-term sales growth of 7-8% pa and an EBIT margin of >20%. The company has also given group guidance of mid-term sales growth of 6% (from 5%) and a 2024 EBIT margin of c.17% (vs PHe of 16.1%). Coats has also stated that it is continuing to offset inflation through pricing and self-help, that it is seeing end-market resilience and that strategic projects will deliver $15m of savings in FY22 (rising to $50m in FY24). We continue to expect Coats to show strong progress given the level of self-help. We see the company as well on track to deliver on forecasts for the current year, with demand continuing to be robust. The rating of 7x PE reducing to 6x looks extraordinary low, in our view, for a business with mid-teens margins and delivering strong growth. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Well positioned to deliver strong growth We recently visited the company’s US operations. This gave an opportunity to discuss with senior management the changes being made in the US to drive higher margins, as well as current market dynamics. Coats has $50m of self-help from the strategic projects, as well as the benefits to come from the footwear acquisitions: we expect more detail in its CMD on 11 October – resister here. We see the company as well on track to deliver forecasts for the current year, with demand robust. The rating of 7x PE, reducing to 6x, to us looks extraordinary low for a business with mid-teens margins and delivering strong growth. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 5-page note
Fleet of foot Coats has followed up its recent $237m purchase of Texon with today’s acquisition of Rhenoflex for $117m. This further expands the company’s leading position in structural footwear components for the athleisure and sports footwear market, as well as providing additional synergy benefits (c.$6m). The company expects medium-term revenue growth of c.8% from the combined businesses and EBITDA margins of >20%. The acquisition was funded through a 10% equity placing, raising £92m ($112m). Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Strong operational performance Coats has had an impressive 1H performance with EBIT +35% in constant currency to $125m (vs our forecast of $115m) on sales growth of 19%. This has been driven by strong volume growth and improved pricing. The EBIT margin improved by 180bp to 15.6% and there is further upside to come as the $50m from the strategic projects comes through. The company expects normalised growth in 2H and full year profits to be moderately ahead of previous expectations. We increase our EBIT forecast by $10m (c.5%) and leave our earnings forecasts unchanged reflecting forex losses on hedging contracts. We continue to see Coats as well placed to manage the inflationary environment as well as gain share due to innovation, sustainability and near-shoring. The company also has a large element of self-help, which will drive both margins and earnings progression. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Self-help to drive performance Coats is in a strong position with global market leadership, the benefits of near-shoring, sustainability driving demand and a large amount of self-help. End markets are likely to be subdued given the economic environment, but Coats is on track to deliver on forecasts and we expect a 16% earnings CAGR over the next three years. Coats’ enhanced position in the supply chain enables it to at least recover inflation, which should ensure strong margin delivery. The market’s caution on consumer-related companies provides a compelling entry point. The next news is the 1H results on 2 August. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 24-page note
Earnings, growth & FCF enhancing acquisition Coats has acquired Texon International for an EV of $237m. The business is focused on structural footwear components for the athleisure market, which will expand Coats’ exposure to this attractive growth market. The business is in adjacent categories to Coats’ existing business and brings synergy opportunities. Texon also has a strong track record of new product development and sustainability credentials. The price looks reasonable at 10.5x prospective EBITDA and 7.5x based on FY24E including synergies. We are increasing our FY23 & FY24 EPS forecasts by 6%. In addition, the transaction should increase Coats’ rate of sales and profit growth, as well as FCF conversion. The rating looks highly attractive given the growth trajectory. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
20% revenue growth Trading in the four months to 30 April has been strong. Constant currency y-o-y revenue growth was 20% (reported +16%), with Apparel & Footwear up 21% and Performance Materials up 16%. This continues the momentum seen in 2H21, with the run-rate ahead of our current published expectations (our forecasts are under review) and ahead of consensus, which looks to be expecting circa 4% growth, Full year guidance is unchanged, with caution around the global macro uncertainty, on-going supply chain issues and cost pressures. Apparel & Footwear: Thread sales grew very strongly as the industry continued to restock and with customers moving to hold more inventory to guard against supply chain issues. Strong pricing and mix are offsetting input cost inflation pressures. Performance Material: Encouragingly, both Personal Protection and Composites saw double digit growth and the whole division saw strong pricing. Self-help initiatives to reduce costs and automate production continue to make progress. Forecasts under review Our forecasts remain under review and are currently circa 3% below FY22E consensus and 10% below FY23E consensus, with the unchanged FY outlook providing some scope to close the gap. The shares currently trade on an attractive 12.4x our published CY22E earnings, falling to 11.8x in CY23E, with a CY23E EV/EBITDA of 5.6x, an 8.7% FCF yield and 2.4% dividend yield. Global leader – strong getting stronger Coats has emerged from the Covid pandemic in a strong position to further increase its market share and leverage its market leading ESG credentials. While we acknowledge the Apparel & Footwear restocking is a short-term benefit, global supply chain disruption has emphasised the need for customers to hold more inventory and reduce supply chain lead times. This plays well into Coats global footprint of circa 50 manufacturing sites and strong customer service.
Excellent start to the year Trading for the first four months was excellent, with constant currency growth of 20%. Both segments have contributed to the performance, with Apparel & Footwear +21% and Performance Materials +16%. The company has been actively passing on price increases, which combined with productivity gains has supported margin progression in both divisions. The company is continuing to see strong growth in EcoVerde, which is on-target to grow by over 50%. All of this increases our confidence in the delivery of full-year forecasts. Coats is trading well, is improving margins and has a material amount of self-help to come through the strategic projects (US$50m of benefit by 2024). The valuation is compelling for a global market leader with strong sustainability credentials. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Exit from Brazil and Argentina Coats has announced it is selling its business in Brazil and Argentina to Reelpar, a PE-backed business in Brazil. This business has been consistently loss making and a drag on margins (c.50bp). The business is largely standalone, servicing the regional market, and so does not affect the global sourcing provision to key customers. Coats is to fund $10m to Reelpar to support restructuring of the business, which is lower cost than alternative solutions. This transaction is separate to the Strategic Project announcement in March, which Coats expects to add $50m to operating profit by 2025E at a cost of $35m. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Big upgrades on strong trading/cost-reduction programmes We are materially increasing forecasts (+8% FY22 and +20% FY23) due to a strong trading performance combined with a $50m cost-saving initiative. We see Coats as very well positioned to benefit from increased demand, market share gains, NPD, focus on sustainability and its position as the global market leader. The results were slightly ahead of forecast, current trading is strong and net debt is materially lower. Coats is a premium business trading on a discount rating. We have increased our target price to 103p, which gives >75% upside. The company is holding a sustainability seminar on 21 March. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 4-page note
FY21 revenue and profit beat – driven by strong 4Q21 FY21 revenue was $1,504m, up 29% y-o-y and up 6% on FY19; this was 5% ahead of our estimate ($1,432m). Adjusted EBITA was $193m, up 75% y-o-y and 1.4% ahead of our $190.3m. Adjusted EPS was 6.8c, 4.6% ahead of our 6.5c forecast. Revenue growth was driven by a strong recovery in Apparel & Footwear (A&F), up 33% y-o-y (+5% versus FY19), and in line with historic growth of 2-3% growth per year. The strong momentum seen in November/December (+20% over FY19 comparative period) has continued in FY22, aided by restocking and timing of holiday periods. Encouragingly, A&F has gained 2% market share (to 23% by value) during 2021, as it leveraged its global manufacturing and strong sustainability offering (EcoVerde recycled thread revenue grew 189% to $96m). Performance Materials (PM) revenue grew 19% y-o-y (+8% over FY19), aided by customer wins. New divisional reporting (Personal Protection (c.40%), Composites (c.25%), and Performance Thread (c.35%)) should aid identification of key growth drivers. Medium-term growth for Composites is expected to be double-digit while Personal Protection could be high single-digits. Inflationary pressures have been offset by higher selling prices and productivity improvement initiatives. Energy costs are only 3% of CoGS and hedging is helping to protect near-term margins. Revenue exposure to Russia/Ukraine is less than 1%. Excluding current labour shortage impacts in PM, the adjusted EBITA margin was 14.4%. Initiatives are being put in place to address these issues and we see scope for these improvements to get the total PM EBITA margin back towards previous highs. Strong cash generation improvement Net cash generated from operations increased by 95% to $129m, aided by proactive inventory management (working capital outflow was only $15m). Net debt looks to be in line with our estimate of $232m (including IFRS 16 lease liabilities). There is a $12.4m exceptional charge for an uncompleted M&A deal, indicating a step-up in the size of M&A activity. Updated FY22 guidance – scope for 10% upgrade to consensus FY23 EBITA FY22 performance is now expected to be ‘modestly’ ahead of previous guidance. We see scope for consensus to upgrade FY22 adjusted EBITA by 2-4%. We see the $50m of strategic projects benefits by 2024 giving scope for a 10% upgrade to FY23 EBITA.
Looking ahead We forecast adjusted EBIT to improve from $110.6m to $190m in FY21. This is, however, still below the peak of $198m seen in 2019 due to supply chain disruptions and rising input costs. We expect the results to confirm that the business is gaining share, recovering cost inflation and is well positioned to show strong progress as the impact of Covid diminishes. In particular, Coats’ ESG credentials should become increasingly obvious as well as important for driving growth. The full year results are due on 3 March. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Housekeeping: We update our forecasts to reflect the recovery momentum seen in customer volumes during 3Q21 and our expectation that this continued through 4Q21 despite the residual Covid-19 disruption to customer production. FY21E upgrades: We increase our FY21E adjusted EBITA estimate by 8.1% to $190.3m, driven by a 9.8% increase in our revenue forecast (to $1,432m, up $127m) partly offset by a minor 20bps decrease in our adjusted EBITA margin to 13.5%. These changes reflect a continuation of volume recovery (+6% in Jan-Oct 2021 versus the 2019 comparative period) in 4Q21 versus our previous estimate and the benefit of higher selling prices as cost inflation (mainly raw materials, energy and freight) is passed through. Minor changes to finance and tax charges result in our FY21E adjusted EPS increasing 11.1% to 6.5c. Outer year upside risk: The higher FY21E revenue base also lifts our outer years by 10% (FY22E up to $1,494m and FY23E to $1,543m). This higher revenue is mostly offset by our assumptions of increased operating costs and lower Performance Materials (PM) margins, reflecting the current US labour cost inflation and availability headwinds. Our FY22E adjusted EPS increases by 1.8% to 7.2c, and FY23E by 2.1% to 7.7c. There is scope for PM margins to improve more quickly if the company accelerates its automation plans or US labour market restrictions ease. Stronger balance sheet: Our cashflow estimates now reflect an assumption that pension contributions reduce in outer years. This is due to the deficit on the main UK pension scheme declining significantly in FY21, thereby increasing the likelihood of a lower company contribution agreement at the next tri-annual review (due by end-2022). Our FY23E net debt reduces by $44m to $128m or 0.5x our FY23E adjusted EBITDA, giving significant capital for organic investment, further bolt-on M&A, and dividend growth. Prelims due 3 March.
Acceleration in 3Q The company reported an acceleration in organic sales, with +6% for the four months to end-October (vs 2019), compared to +1% in 1H. This is despite the widespread supply chain disruptions, with Vietnam particularly affected during the period. The company is actively recovering higher input, energy and freight costs through pricing and productivity, and is on-track to meet full-year expectations. We see this performance as very encouraging given the headwinds, and it shows that the company is well positioned to improve organic sales growth and margins, particularly as consumers, brands and retailers increasingly focus on sustainability. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
On track for the full year We are not surprised the shares have been soft given the direction of equity markets and the general commentary on supply chain challenges. From Coats’ point of view, the good news is that the Covid restrictions are lifting in Vietnam and the company’s main plants in China are not seeing power supply issues. In any case, the company’s broad supply chain places it at a material advantage vs its smaller competitors. Our full-year forecasts were predicated on expected supply chain disruptions and the company remains on track to deliver the numbers. We see the recent weakness as a good opportunity as the supply chain issues diminish. Next news is the 3Q update in November. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Impressive margins in A&F The headline numbers were pre-released, so the improvement in EBIT (US$95m vs US$34m) was as expected. However, the stand-out feature of the results was the increase in Apparel & Footwear margin to 15.5%, which is ahead of the pre-pandemic level. Performance Materials margins are improving, but are currently being impacted by labour availability in the US. The company has made an optimistic outlook statement, with improving trends in volumes, new contracts and NPD. Our forecasts assume an ongoing Covid impact in 2H. The shares continue to look good value on 7.3x EV/EBITDA (including the pension deficit) and 13x PE to Dec 2022E. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Interims in line The key revenue, profit and growth numbers were pre-released on 14 July so no surprises today. We put our forecasts under review and continue to see scope for FY21 consensus adjusted EBITA to move towards $190m from the current circa $180m. This implies a 4-5% upgrade, albeit the shares have moved since 14 July to reflect this. 1H revenue was $732m, as pre-announced, with trading in May and June better than previously expected. Group 1H21 organic sales growth was 1% (+3% ex India CV19 disruption), In A&F, the core threads sales were up 2% (flat versus FY19). Performance Materials (PM) saw 4% revenue growth versus the FY19 comparative, with most sub-segments performing strongly apart from PPE. Adjusted EBITA was $95m, ahead of our $82.2m forecast and showing the recovery to be v-shaped. There is extra detail on margins. A&F margins are getting back to pre-CV19 levels although PM, which has c.50% of production in North American, is continuing to struggle with labour shortages. PM operating margins, at 6.4% remain well below previous levels, hindered by capacity utilisation at below 60%. Short-term self-help action is being taken to ease the pressure, such as shift pattern changes, and in the medium-term increased automation is being planned. The labour shortages are expected to start easing in September when Federal subsidies are removed, but local subsidies remain in place. Cost inflation, especially in raw materials, is being offset by price increases and operational self-help. This reconfirms to us that Coats has strong pricing power and good customer relations. CV19 operational disruption is being managed well, with the benefit of its large global footprint allowing production to be moved between sites. Interim dividend of 0.61c, better than our 0.55c estimate. Net debt $168m (pre-IFRS 16), as expected. Attractive valuation for a global market leader Valuation continues to look attractive given its global market leading position, ESG credentials, and new innovations pipeline. On current forecasts, the shares trade on only 17x CY21E earnings, falling to c.14x in CY22E; on a CY22E EV/EBITDA of 6.7x with a FCF yield of 3.3%; and improving to 7% in CY23E. The progressive dividend currently yields 2.2% in CY22E.
FY21 ahead – scope for 5-6% upgrades to consensus The interim pre-close update confirmed that trading in May and June has been better than management had expected, despite the lockdown impact in India. 1H Group revenue is $732m, materially ahead of our $608m. Group 1H21 organic sales are up 1% over the same period in FY19; this would have been +3% excluding the India impact in May/June. In A&F, the core threads sales were up 2% (flat versus FY19) and accounted for 85% of division revenue. Positive improvement continues with strong growth in sports and athleisure wear as the casualization trend continues. Zips and trims within A&F continue to see weak demand. Performance Materials saw 4% revenue growth versus the FY19 comparative, with all sub-segments performing strongly apart from PPE which continues to suffer from US labour shortages, as previously announced. This is expected to ease post September when government support is withdrawn. Likely upgrades to consensus Group adjusted operating profit in 1H21 is now expected to be $95m, ahead of FY20 ($34m) and getting closer to the FY19 level of $102m, showing the recovery to be v-shaped. Historical 1H:2H splits are broadly evenly weighted, so we would expect a similar EBITA outturn in 2H21. We therefore see scope for consensus adjusted EBITA to upgrade by 5-6% from the current $179m (INVe $176m) towards $190m. We put our forecasts under review. Cost inflation Cost inflation, especially raw materials, is being offset by price increases and operational self-help. We expect further raw material inflation in 2H21 as the higher oil price feeds through, albeit we fully expected this to be passed on in higher selling prices. Shares continue to look good value for a global market leader On current forecasts, the shares trade on only c.16x CY21E earnings, falling to c.13x in CY22E, CY22E EV/EBITDA of 6.4x, with a FCF yield of 3.5%, improving to 7% in CY23E. The progressive dividend currently yields 2.3% in CY22E. Interims results are due on 3 August.
Trading ahead of expectations The improving trends have continued and strong operational performance means that the full year is expected to be ahead of the company’s previous expectations. We are upgrading our EPS forecasts by c.10%, which follows a 6% increase in May. This was achieved despite the negative impact of recent lockdowns in India, which have now subsided. Assuming no further material Covid impacts, we expect the positive trends to continue and and we are increasingly confident that Coats will emerge from the Covid period with an accelerating sales performance driven by digitisation, new product development and sustainability. We increase our target price from 80p to 85p. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Positive upgrade surprise Sales trends have improved faster than expected and the company is successfully implementing pricing and productivity actions to offset inflationary pressure. As a result, we are upgrading our 2021E by 5%. Sales are now trending ahead of 2019 levels and we are increasingly confident that Coats will emerge from the Covid period with an accelerating sales performance driven by digitisation, new product development and sustainability. The shares look excellent value on c.6x EV/EBITDA, particularly as we see upside risk to numbers. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Trading ahead Trading has been ahead of prior management expectations in the first four month of FY21. A&F customer volumes continue to recover, driven by threads (+2% vs FY19) while zips is still down on FY19 levels. Threads is benefitting from higher sportswear and footwear sales in Europe and the US. Zips are mainly focused on luxury products, such as handbags and boots. Performance Materials volumes were good to very good in all segments apart from Personal Protection where US labour shortages continue to affect production despite having strong order books. Telecoms and energy end markets have recovered strongly from 2020 CV19 disruption. Automotive volumes have benefitted from 2020 new contract wins. Cost inflation headwinds grow, but are being passed through At the FY20 results, the company set out $45m of cost headwinds, equally split between raw materials, non-raw materials (mainly labour) and freight cost inflation, partially offset by $15m of cost savings. Current inflation trends are in line with management’s expectations from March. Pricing power: Management are actively passing-through the raw material cost inflation into higher pricing. Forecast under review Trading is ahead of management’s expectations and we see scope for current consensus adjusted EBITA (c.$169m) to move up towards our $176m, implying a 3-4% upgrade. Valuation: Continues to look attractive, trading on 11.5x CY22E earnings for a global market leader. We believe the current market disruption from CV19 and increasing focus on sustainability all play into Coats gaining further market share.
Plenty to be positive about The FY results are ahead of expectations, net debt is lower than expected, the dividend was restored and Coats had an encouraging start to the year. The continuing lockdown and higher material and freight costs are likely to slow the pace of recovery, but momentum is looking positive and Coats is well placed to gain share and accelerate top-line growth. We are not changing our forecast for sales trajectory at this stage, but higher costs results in a 4% reduction in our 2021E profit and 1% to 2022E. We continue to see the valuation as attractive given the likely strong bounce-back and return to mid-teens margins. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 4-page note
Volume improvement: 3Q volumes were much better than feared. We had been factoring in a 50% y-o-y organic decline, and, at a group leve,l revenue was only down 15% (A&F -15%, Performance Materials -13%). This follows the 26% organic decline seen in 1H20. ESG angle: Ecoverde recycled thread saw strong volume growth. A&F: Trading saw continued sequential improvement through 3Q. All Coats manufacturing sites are now open. The group has seen improving visibility as customers have confidence again to place orders into the peak September-to-November production season (for the spring/summer 2021 sales season). Performance Materials: Encouragingly, Transportation end markets achieved y-o-y growth in 3Q, aided by new customer wins. The composite product is gaining customer traction, we understand. Household & recreation also increased y-o-y as bedding and home textiles benefitted from consumers focusing on home improvements. PPE, Telecoms and Energy continue to have long-term growth potential 17% FY20E EBITA upgrade: We adjust our forecasts (see Figure 1) to reflect this update and upgrade our FY20E adjusted EBITA to $105.1m, in the middle of the new range. This is a 17% upgrade at adjusted EBITA level, but a much greater 57% EPS upgrade due to the effect of fairly fixed minority payments. Uncertainty remains: We remain cautious about the FY20 exit run-rate and given the new CV19 lockdowns and the impact this could have on A&F demand, we leave our FY21E and FY22E forecasts unchanged. These still expect a material bounce back in profits as volumes recover on the back of improving demand (similar to that seen in 2009/2010 after he GFC). Valuation upside: We leave our TP unchanged at 86p. We believe the shares have re-rating potential as Coats increases its global market leader position.
Road to recovery: Coats achieved adj. EBITA of $34m in 1H20 despite making a modest loss in 2Q. While the risk of a global CV19 second wave remains, the sequential improvement in recent months is encouraging. We now estimate 2H20E adj. EBITA of $56m, which includes the September-November ‘high-season’. This is down from $96m in 2H19. We believe this is achievable provided we do not experience another global CV19 lockdown. Our new FY21E adj. EBITA estimate is $176m, down $32m or 16%. Forecast adjustments post 1H: We take a more cautious view on EBIT margin expansion, especially in FY21E, reducing our previous positive mix improvement driven by Performance Material (see Figure 6). This is due to key end markets, such as Automotive and PPE, taking longer to make commercial gains given the CV19 disruption. Albeit we note that 1H20 saw the delivery of volume composite parts to a European Automotive OEM. Higher tax rate guidance is the key new element (c.41%, up from 30%). Along with the relatively fixed nature of minority interest payments, these drive down our EPS forecasts with FY20E nearly halving to 1.1c and FY21E by 21% to 5.9c. Recent FX movements could reduce the headwinds in 2H20. Long-term investment case intact: The key elements of our original investment case remain very much intact, we review these on page 7. Slower balance sheet delevering: Management were quick to cut costs and preserve cash. The net debt-to EBITDA leverage ratio at 1H20 was higher than we expected due to working capital; on our new FY20E estimates, the ratio has risen to 1.9x. RoCE fell y-o-y in 1H, but even so remained at a healthy 28%. New CFO: As Simon Boddie retires from the company, we welcome the lengthy transition period as the role is taken on by new CFO Jackie Callaway.
Update covering four months to 30 April Reported Group sales were down 21% organically with Apparel & Footwear (A&F) down 23% and Performance Materials (PM) down 12%. Within A&F, we believe footwear has been slightly more resilient than apparel given regional comments from management and recent news flow from key market players, such as Nike. In PM, autos has been one of the most challenged end markets, although COA has made significant progress with Chinese auto suppliers, winning eight out of ten recent tenders. Telecoms and PPE end markets have been more resilient, albeit still down in April y-o-y, aided by significant investment in subsea fibre optic cabling by the internet giants and the obvious increased need for PPE equipment. Sales in April were down 50% y-o-y, impacted by lower demand and the closure of 15 manufacturing sites (out of 51) due to CV19 restrictions. This has improved in May with only two sites continuing to be closed. This April sales reduction is in line with our 2Q and 3Q underlying assumption of a 50% y-o-y reduction in sales. Swift cost cutting action has reduced operating costs by 40% y-o-y, aiding a broadly neutral cash burn in April. Pension payment deferral The incremental new cashflow news today is an agreement with the pension trustees to defer the remaining FY20 payments (April – Dec), saving $17m. The catch-up payments will start in mid-FY21 and be paid evenly over an 18 months period. Liquidity remains strong, with net debt as of 30 April at $253m (pre-IFRS 16), up on FY19 due to the acquisition of Pharr ($37m) and seasonal working capital movements. Gross debt headroom is $235m. No change to forecasts We leave our forecasts unchanged across all years having made significant cuts to FY20E in mid-April. The April revenues declines are in line with our assumptions of circa. 50% revenue declines in 2Q and 3Q with improvement in 4Q as the supply chain recovers to focus on 2021 demand. We believe there is scope for a quicker recovery in demand, but this will very much depend on how consumers react to discounting over the summer months to reduce industry inventory levels. We expect little change to consensus FY20 P&L forecasts on the back of today’s update. How these inventory levels exit CY20 will affect our assumption of a rapid recovery in volumes and profitability in FY21. We expect COA to emerge from this crisis with a stronger market position, making the current valuation very compelling. Buy reiterated.
FY19 profits as expected Group revenue was $1,389m, up 1% organically (-2% reported), in line with our $1,400m estimate. The A&F division grew revenue by an organic 1% to $1,063m (INVe $1,064m) with the core thread business growing 2% y-o-y, ahead of the underlying market (+c.1%). The zips and trims business (10% of A&F sales) saw revenue 3% lower y-o-y due to a conscious move away from low-margin work. Performance Materials +1.4%, with trading broadly as expected in Nov/Dec. Automotive end markets continue to be weak (down 8% y-o-y in 2H19, -5% in 1H19), while Telecoms and Energy grew revenue 7% and has attractive medium-term opportunities. Personal Protection revenue grew 6%. Adjusted EBIT was $198m, in line with our $198m estimate and consensus ($198m). The adjusted EBIT margin increased 50bps to 14.3%. Adjusted EPS was 7.0c, in line with our 7.0c. Cash generation Free cash flow generation was $107m, beating our $72m estimate. Year-end net debt (including IFRS 16) was $215m, $10m above our $225m estimate. Our FY20E net debt is sub 0.5x EBITDA, giving sufficient headroom for further bolt-on M&A. Strong dividend growth The proposed full-year dividend increased 11% to 1.85c, much better than our 1.75c or 5% y-o-y growth and indicates the Board’s capital allocation priorities. COVID-19 – small impact so far – forecasts unchanged, although downside risk There has been a small impact to date ($8m adverse on sales) with Chinese operations accounting for c.10% of sales. It remains too early to assess the impact on the wider supply chain. Conference call/webcast at 8.30am The webcast can be accessed via www.coats.com/investors/fy2019. The conference call can be accessed by dialling +44 (0)20 3936 2999 and using participant access code '35 90 73'. Valuation We leave our forecasts, target price and Buy recommendation unchanged. The valuation remains attractive with the shares trading at 10x our CY20E earnings, falling to 9x in CY21E, with a CY20E EV/EBITDA of 5x, 9% FCF yield and 2.6% dividend yield.
1% organic growth A reassuring update in challenging end markets. Coats has reported flat group revenue growth for the four months to 31 October (at constant currency) while year-to-date revenue grew 1% y-o-y. This slowing in activity levels is not surprising to us, given the macro headwinds, and is against tough comparatives. The lower growth is in line with our revised forecasts as discussed in our 11 October 2019 sector report (here). Minor guidance downgrade – our forecasts are unchanged Given the slower top line growth experienced in recent months, the Coats Board has issued revised guidance for FY19 adjusted operating profit. The new range is $196m to $201m (INVe $198m, company-compiled consensus $203m, Bloomberg $202m). If consensus were to move to the middle of this new range ($198.5m), it would reduce by 1.7%, a minor movement which we believe should be taken as reassuringly resilient given the macro headwinds. We leave our forecasts unchanged. Flat footed – Apparel & Footwear Underlying retail markets continue to be challenging and mixed on a geographical basis. The core threads business achieved 2% revenue growth in the four month period, with strong performances in the peak September and October months. Zips saw a mid-single digit revenue decline, partly due to portfolio rationalisation actions. Latin American Crafts started to see a sequential improvement, although revenue still declined y-o-y. Performance Materials - Slow telecoms Revenue in the period was flat y-o-y, down from the +4% seen in 1H19. The main areas of lower growth were Personal Protection and Telecom / Energy, which saw strong growth in 2H18 and 1H19. The company believes this is due to customer de-stocking and the phasing of customer programmes in Europe. Autos was weaker, as we expected, with y-o-y revenue declines after been stable during 1H19. We remain positive on the significant long-term growth opportunities within autos from lightweight composites development. We anticipate more positive newsflow on this in 2020. Encouragingly, the more traditional end markets, such as Household and Recreation, returned to growth, aided by self-help initiatives, delivering an improved performance from these end markets.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Coats is a long-established, leading industrial thread and textiles business and newly-established as an independent quoted entity. It is seeking sustained, high-quality earnings growth through product and service innovation across its international operations. We believe that this can be achieved, notwithstanding the presence of legacy issues to be resolved.
