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.
Written by
Coats Group |
Above market growth |
Trading update |
General industrials |
20 November 2017 |
Share price performance
Business description
Next events
Analyst
Coats is a research client of Edison Investment Research Limited |
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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$m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/15 |
1,472.5 |
127.3 |
5.0 |
0.0 |
21.5 |
N/A |
12/16 |
1,457.3 |
140.7 |
5.8 |
0.8 |
18.5 |
0.8 |
12/17e |
1,501.9 |
155.8 |
6.5 |
1.5 |
16.6 |
1.3 |
12/18e |
1,557.8 |
157.9 |
6.7 |
1.7 |
16.1 |
1.6 |
Note: Continuing operations only. *PBT, EPS are Edison normalised, excluding intangible amortisation, exceptional items and share-based payments. **Pro forma FY16 1.25c/1.3%.
Maintained Industrials growth, with subtle mix shift
Coats’ key Industrial segment continues to show revenue growth clearly ahead of GDP in its leading North American and western European end-markets in market conditions which are described as competitive. At +5% l-f-l progress for both, the 10 months to October is in line with the reported H1 period; mix has shifted slightly, in favour of Apparel & Footwear (+6%), with Performance Materials (PM) growth trimmed (now +4%). The latter effect is due to diverging subsector patterns with traditional markets (c 50% of PM) flat to slightly down and newer niches growing at double-digit rates. PM continues to focus on new segment development, targeting high single digit organic growth rates. FX translation (into US$) 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
|
|
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