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.
Industrial was the standout H115 performer, with c 8% l-f-l revenue progress in two out of three regions. Both subsectors were also ahead (led by Specialty) and EBIT margins improved by 90bp y-o-y (to 10.8%). Crafts was more mixed, with a drop in the higher-margin fashion sector negatively affecting profits and margins. Underlying free cash outflow was US$37m in the first six months (c $12m higher yo-y due to debtor build-up) with US$234m net cash at the period end. Management achieved a US$50m rolling 12-month inflow for this measure (in the year to June 2015), which highlights significant seasonal working capital swings in the business. A small reduction in the sizeable IAS19R pension deficit was seen with no discernible change in company position here or on US environmental matters, with Coats continuing to take a robust stance on both. No dividend was declared.
At the Coats’ capital market event in June, the quality of the company’s operations, international infrastructure and market positions were very apparent. Under its new status as an independent business, management is taking strides to ensure that this translates to high-quality earnings and growth. The two leading areas of customer focus are innovation in new products and commercial service delivery. Supporting this with business investment, productivity gains and opex cost reduction is designed to ensure that revenue growth is accompanied by margin expansion. Selective, in-fill acquisitions (with well-defined criteria and fit with the existing Industrial and group profiles) are also part of the growth strategy.
Since becoming an independently-listed entity on 26 February, Coats’ share price has moved up from 22.5p to current levels, significantly outperforming the FTSE All-Share Index. We believe its healthy double-digit earnings growth expectations are not fully reflected in the company’s rating. We acknowledge that legacy issues bring investor uncertainty but, in our view, they should not prevent management from executing its operational strategy.