Coats Group — Above market growth

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.

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Written by

Coats Group

Above market growth

Trading update

General industrials

20 November 2017

Price

82.75p

Market cap

£1,170m

£/US$ 1.30

Net debt (US$m) at end June 2017

261

Shares in issue
(includes Treasury shares)

1,413.3m

Free float

97%

Code

COA

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.0)

9.5

114.9

Rel (local)

(5.3)

10.0

94.7

52-week high/low

89.5p

37.5p

Business description

Coats Group is a leading producer of industrial thread and consumer craft textiles with over 70 manufacturing sites internationally. Its divisions are Industrial: Apparel & Footwear (67%) and Performance Materials (c 17%); and Crafts (16%), based on FY16 revenue.

Next events

US capital markets event

28-29 November 2017

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Coats is a research client of Edison Investment Research Limited

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.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS**
(c)

P/E
(x)

Yield
(%)

12/15

1,472.5

127.3

5.0

0.0

21.5

N/A

12/16

1,457.3

140.7

5.8

0.8

18.5

0.8

12/17e

1,501.9

155.8

6.5

1.5

16.6

1.3

12/18e

1,557.8

157.9

6.7

1.7

16.1

1.6

Note: Continuing operations only. *PBT, EPS are Edison normalised, excluding intangible amortisation, exceptional items and share-based payments. **Pro forma FY16 1.25c/1.3%.

Maintained Industrials growth, with subtle mix shift

Coats’ key Industrial segment continues to show revenue growth clearly ahead of GDP in its leading North American and western European end-markets in market conditions which are described as competitive. At +5% l-f-l progress for both, the 10 months to October is in line with the reported H1 period; mix has shifted slightly, in favour of Apparel & Footwear (+6%), with Performance Materials (PM) growth trimmed (now +4%). The latter effect is due to diverging subsector patterns with traditional markets (c 50% of PM) flat to slightly down and newer niches growing at double-digit rates. PM continues to focus on new segment development, targeting high single digit organic growth rates. FX translation (into US$) turned from being a marginal headwind to a neutral y-o-y position in recent months. Crafts division (-12%) is still being buffeted between tough markets and certain customer.

Focus on strategic growth drivers

The trading update also flagged an update on strategic progress with FY17 results in February. In our view, this is likely to emphasise ongoing initiatives to simplify and innovate business streams, underpinned by leading IT-driven service and the high standards of supply chain responsibility required by high profile customer brands. As a result, we believe that Performance Materials will become more prominent, as will the higher growth rates being sought in developing its targeted niche segments.

Valuation: Solid performance, increasing cash focus

Coats has been a solid performer ytd, with its share price increasing by c 50% in a broadly steady progression throughout the year, although it is currently sitting below the high earlier in the month. On unchanged profit estimates, the company’s current year P/E of 16.6x reduces to 15.5x by FY19e and EV/EBITDA (adjusted for annual pension cash payments and using in-year net debt) moves from 9.3x to 8.3x on the same basis. The earnings multiple may appear full given prospective growth rates, though we think that cash generation and cash multiples will become more important in investors’ eyes in future.

Exhibit 1: Financial summary

US$m

2014

2015

2016

2017e

2018e

2019e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

Revenue

 

 

1,561.4

1,489.5

1,457.3

1,501.9

1,557.8

1,610.8

Cost of Sales

 

 

(993.4)

(930.1)

(892.3)

(919.6)

(953.8)

(986.3)

Gross Profit

 

 

568.0

559.4

565.0

582.3

603.9

624.5

EBITDA

 

 

170.0

183.0

198.6

212.1

214.9

222.5

Operating Profit (before GW and except.)

 

 

123.4

139.4

157.9

170.3

174.9

181.5

Net Interest

 

 

(8.7)

(6.3)

(10.1)

(12.5)

(14.0)

(14.0)

Other finance

 

 

13.5

(6.3)

(7.1)

(2.0)

(3.0)

(3.0)

Intangible Amortisation - acquired

 

 

0.0

0.0

0.0

0.0

0.0

0.0

Pension Net Finance Costs

 

 

(11.3)

(17.1)

(13.6)

(10.2)

(10.2)

(10.2)

Exceptionals

 

 

(20.0)

(29.9)

(3.3)

(1.7)

0.0

0.0

Profit Before Tax (Edison norm)

 

 

128.2

126.8

140.7

155.8

157.9

164.5

Profit Before Tax (Company norm)

 

 

116.9

109.7

127.1

145.6

147.7

154.3

Profit Before Tax (FRS 3)

 

 

96.9

79.8

122.5

141.9

145.7

152.3

Tax

 

 

(45.1)

(43.7)

(46.8)

(50.8)

(49.9)

(52.0)

Discontinued

 

 

(27.2)

(75.5)

(4.5)

0.0

0.0

0.0

Profit After Tax (norm)

 

 

55.9

7.6

89.4

105.1

108.0

112.5

Profit After Tax (FRS 3)

 

 

24.6

(39.4)

71.2

91.2

95.8

100.3

Minorities

 

 

(9.6)

(11.2)

(11.9)

(12.2)

(12.5)

(12.8)

Profit Attributable to Shareholders

 

 

15.0

(-50.6)

59.3

79.0

83.4

87.6

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

1,407.4

1,400.8

1,386.6

1,398.0

1,398.0

1,398.0

EPS FD - Edison norm (c)

 

 

5.2

5.0

5.8

6.5

6.7

7.0

EPS FD - Company norm (c)

 

 

3.1

4.0

4.8

5.8

5.9

6.2

EPS - FRS 3 (c)

 

 

1.1

(3.6)

4.3

5.7

6.0

6.3

Dividend per share (c)

 

 

0.0

0.0

0.8

1.5

1.7

2.0

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

36.4

37.6

38.8

38.8

38.8

38.8

EBITDA Margin (%)

 

 

10.9

12.3

13.6

14.1

13.8

13.8

Operating Margin (before GW and except.) (%)

 

 

7.9

9.4

10.8

11.3

11.2

11.3

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed Assets

 

 

653.9

627.9

654.8

673.9

685.9

696.9

Intangible Assets

 

 

256.7

261.2

291.8

292.2

296.2

300.2

Tangible Assets

 

 

298.2

273.0

265.9

278.0

286.0

293.0

Pension Surplus

 

 

51.0

52.5

50.8

49.8

49.8

49.8

Other

 

 

48.0

41.2

46.3

53.9

53.9

53.9

Current Assets

 

 

1,308.4

1,122.6

937.8

624.8

673.0

722.7

Stocks

 

 

257.8

204.0

205.8

212.1

220.0

227.5

Debtors

 

 

311.6

268.7

255.5

261.5

269.1

276.4

Cash

 

 

739.0

649.9

476.5

151.2

183.8

218.9

Current Liabilities

 

 

(576.6)

(437.9)

(660.3)

(357.2)

(377.2)

(397.8)

Creditors

 

 

(463.1)

(417.7)

(652.6)

(357.2)

(377.2)

(397.8)

Short term borrowings

 

 

(113.5)

(20.2)

(7.7)

0.0

0.0

0.0

Long Term Liabilities

 

 

(985.1)

(958.6)

(841.3)

(712.0)

(690.0)

(668.0)

Long term borrowings

 

 

(304.6)

(389.1)

(390.6)

(366.9)

(366.9)

(366.9)

Other long term liabilities

 

 

(680.5)

(569.5)

(450.7)

(345.1)

(323.1)

(301.1)

Net Assets

 

 

400.6

354.0

91.0

229.5

291.7

353.8

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

161.2

87.7

75.7

(149.6)

184.2

192.2

Net Interest

 

 

(13.5)

(5.3)

(10.0)

(12.5)

(14.0)

(14.0)

JV/Minorities

 

 

(5.2)

(10.1)

(13.4)

(12.2)

(12.5)

(12.8)

Tax

 

 

(55.7)

(49.3)

(57.9)

(55.8)

(53.9)

(55.0)

Capex

 

 

(40.8)

(31.4)

(35.3)

(55.0)

(50.0)

(50.0)

Acquisitions/disposals

 

 

0.4

(5.4)

(40.1)

0.0

0.0

0.0

Financing

 

 

0.2

(7.6)

(2.7)

2.5

0.0

0.0

Dividends

 

 

0.0

0.0

0.0

(18.1)

(21.2)

(25.4)

Net Cash Flow

 

 

46.6

(21.4)

(83.7)

(300.6)

32.7

35.0

Opening net debt/(cash)

 

 

(274.3)

(320.9)

(240.6)

(78.2)

215.7

183.1

HP finance leases initiated

 

 

0.0

0.0

0.0

3.8

0.0

0.0

Other

 

 

0.0

(58.9)

(78.7)

2.9

0.0

0.0

Closing net debt/(cash)

 

 

(320.9)

(240.6)

(78.2)

215.7

183.1

148.0

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Coats Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) of Myonlineadvisers Pty Ltd (AFSL: 427484) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Coats Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) of Myonlineadvisers Pty Ltd (AFSL: 427484) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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