Coats Group
Written by
Coats Group |
Moving forward |
IMS trading update |
General industrials |
18 October 2016 |
Share price performance
Business description
Next events
Analysts
Coats Group is a research client of Edison Investment Research Limited |
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Q3 trading has been solid and a little better than earlier expectations, leading us to raise earnings estimates by c 6% for the current year and c 4% for the following two. As previously noted, we believe that greater clarity on pensions is nearer for all stakeholders, which will allow a clean evaluation of strategy and earnings growth and dividend pay-out potential for the first time.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
1,561.4 |
128.2 |
5.2 |
0.0 |
9.4 |
N/A |
12/15 |
1,489.5 |
126.8 |
5.0 |
0.0 |
9.9 |
N/A |
12/16e |
1,490.1 |
135.4 |
5.6 |
0.0 |
8.7 |
N/A |
12/17e |
1,543.8 |
143.8 |
6.2 |
0.0 |
7.9 |
N/A |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Continuing operations only; FY16e & FY17e exclude UK Crafts.
Q3 sees Industrial volume growth and margin uplift
The recent trading update (13 October) was brief but indicated that earlier guidance on the expected development of H2 Industrial sales had been overly cautious. Specifically, Apparel & Footwear activities have regained momentum after a flat Q2. Also, Speciality threads are now more in line with target trends, with a pick-up in some markets (eg US consumer durables) and no further deterioration in others (eg oil and gas). We believe that improved Q3 trading has been volume driven with no net benefits from either pricing or underlying demand. In Crafts (now entirely in the Americas) some margin recovery has been achieved moving into the busier Q4 trading period. Putting all of these elements together, we have increased our Industrial margin expectations by c 0.5% (to 12.4%) in all three years – on modestly higher revenues – with a slightly smaller Crafts margin uplift in the current year only. These effects are partly offset by higher interest costs (weaker sterling against the US dollar and lower rates on sterling cash balances) but the net effect is EPS estimate increases of c 6% for FY16 and just under 4% in the following two years.
Possible positive non-trading newsflow by year end
The IMS was light on further information related to non-trading items apart from a potential positive impact of FX movements on financial instruments. Separately, we believe that there is a realistic possibility of concrete proposals on the resolution of the Pensions Regulator’s issue with the UK defined benefit schemes by the end of FY16. Full agreement of all parties would have to follow and, if that was not forthcoming, a more protracted, possibly legal, process would ensue.
Valuation: Still single digit P/E multiples
Coats’ share price has moved ahead of the 30p level for the first time as an independent company. Dollar earnings and a positive trading update contributed but there may also be growing investor comfort with non-trading matters. The simple P/E multiple is now 8.7x for FY16 falling to 7.9x one year out. We expect cash multiples to take greater prominence once there is greater pensions clarity.
Exhibit 1: Financial summary
US$m |
2014 |
2015 |
2016e |
2017e |
2018e |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
|
1,561.4 |
1,489.5 |
1,490.1 |
1,543.8 |
1,594.8 |
Cost of Sales |
|
|
(993.4) |
(930.1) |
(920.1) |
(953.3) |
(984.8) |
Gross Profit |
|
|
568.0 |
559.4 |
570.0 |
590.5 |
610.0 |
EBITDA |
|
|
170.0 |
183.0 |
197.8 |
208.0 |
218.7 |
Operating Profit (before GW and except.) |
|
|
123.4 |
139.4 |
152.8 |
159.3 |
166.3 |
Net Interest |
|
|
(8.7) |
(6.3) |
(11.2) |
(12.5) |
(12.0) |
Other finance |
|
|
13.5 |
(6.3) |
(6.2) |
(3.0) |
(3.0) |
Intangible Amortisation - acquired |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Pension Net Finance Costs |
|
|
(11.3) |
(17.1) |
(15.0) |
(15.0) |
(15.0) |
Exceptionals |
|
|
(20.0) |
(29.9) |
(2.3) |
0.0 |
0.0 |
Profit Before Tax (norm) |
|
|
128.2 |
126.8 |
135.4 |
143.8 |
151.3 |
Profit Before Tax (FRS 3) |
|
|
96.9 |
79.8 |
118.1 |
128.8 |
136.3 |
Tax |
|
|
(45.1) |
(43.7) |
(46.0) |
(46.0) |
(48.4) |
Discontinued |
|
|
(27.2) |
(75.5) |
0.0 |
0.0 |
0.0 |
Profit After Tax (norm) |
|
|
55.9 |
7.6 |
89.4 |
97.8 |
102.9 |
Profit After Tax (FRS 3) |
|
|
24.6 |
(39.4) |
72.1 |
82.8 |
87.9 |
Minorities |
|
|
(9.6) |
(11.2) |
(11.6) |
(11.9) |
(12.2) |
Profit Attributable to Shareholders |
|
|
15.0 |
(-50.6) |
60.5 |
70.9 |
75.7 |
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
|
1,407.4 |
1,400.8 |
1,383.6 |
1,383.6 |
1,383.6 |
EPS - normalised (c) |
|
|
5.2 |
5.0 |
5.6 |
6.2 |
6.6 |
EPS - FRS 3 (c) |
|
|
1.1 |
(3.6) |
4.4 |
5.1 |
5.5 |
Dividend per share (c) |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
36.4 |
37.6 |
38.3 |
38.3 |
38.3 |
EBITDA Margin (%) |
|
|
10.9 |
12.3 |
13.3 |
13.5 |
13.7 |
Operating Margin (before GW and except.) (%) |
|
|
7.9 |
9.4 |
10.3 |
10.3 |
10.4 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
|
|
653.9 |
627.9 |
660.0 |
656.3 |
648.9 |
Intangible Assets |
|
|
256.7 |
261.2 |
288.4 |
279.4 |
270.4 |
Tangible Assets |
|
|
298.2 |
273.0 |
274.7 |
280.0 |
281.6 |
Pension Surplus |
|
|
51.0 |
52.5 |
51.1 |
51.1 |
51.1 |
Other |
|
|
48.0 |
41.2 |
45.8 |
45.8 |
45.8 |
Current Assets |
|
|
1,308.4 |
1,122.6 |
1,080.8 |
1,146.0 |
1,219.4 |
Stocks |
|
|
257.8 |
204.0 |
201.8 |
209.1 |
216.0 |
Debtors |
|
|
311.6 |
268.7 |
268.6 |
276.1 |
283.3 |
Cash |
|
|
739.0 |
649.9 |
610.4 |
660.8 |
720.1 |
Current Liabilities |
|
|
(576.6) |
(437.9) |
(396.8) |
(422.3) |
(447.4) |
Creditors |
|
|
(463.1) |
(417.7) |
(396.8) |
(422.3) |
(447.4) |
Short term borrowings |
|
|
(113.5) |
(20.2) |
0.0 |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(985.1) |
(958.6) |
(1,068.8) |
(1,033.5) |
(998.2) |
Long term borrowings |
|
|
(304.6) |
(389.1) |
(461.1) |
(461.1) |
(461.1) |
Other long term liabilities |
|
|
(680.5) |
(569.5) |
(607.7) |
(572.4) |
(537.1) |
Net Assets |
|
|
400.6 |
354.0 |
275.2 |
346.6 |
422.7 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
161.2 |
87.7 |
110.6 |
164.7 |
175.8 |
Net Interest |
|
|
(13.5) |
(5.3) |
(11.2) |
(12.5) |
(12.0) |
JV/Minorities |
|
|
(5.2) |
(10.1) |
(10.5) |
(10.8) |
(11.1) |
Tax |
|
|
(55.7) |
(49.3) |
(46.0) |
(46.0) |
(48.4) |
Capex |
|
|
(40.8) |
(31.4) |
(43.9) |
(45.0) |
(45.0) |
Acquisitions/disposals |
|
|
0.4 |
(5.4) |
(39.9) |
0.0 |
0.0 |
Financing |
|
|
0.2 |
(7.6) |
(2.9) |
0.0 |
0.0 |
Dividends |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Net Cash Flow |
|
|
46.6 |
(21.4) |
(43.9) |
50.3 |
59.3 |
Opening net debt/(cash) |
|
|
(274.3) |
(320.9) |
(240.6) |
(149.3) |
(199.7) |
HP finance leases initiated |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
|
|
0.0 |
(58.9) |
(47.4) |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
(320.9) |
(240.6) |
(149.3) |
(199.7) |
(259.0) |
Source: Company data, Edison Investment Research
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