Coats Group
Written by
Coats Group |
Pensions progress and dividend returns |
Pensions update |
General industrials |
19 December 2016 |
Share price performance
Business description
Next events
Analysts
Coats Group is a research client of Edison Investment Research Limited |
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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.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
1,561.4 |
128.2 |
5.2 |
0.0 |
12.1 |
N/A |
12/15 |
1,489.5 |
126.8 |
5.0 |
0.0 |
12.8 |
N/A |
12/16e |
1,490.1 |
135.4 |
5.6 |
0.0 |
11.3 |
N/A |
12/17e |
1,543.8 |
141.8 |
6.1 |
1.5 |
10.4 |
3.0 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Continuing operations only; FY16e and FY17e exclude UK Crafts.
Two UK DB pension schemes agree terms
Coats had a group net cash position of US$59m at the end of June (including US$396m parent-company cash). We had factored in c US$29m annual recovery payments into the Coats UK and Brunel DB pension schemes (plus a further c US$6m into the Staveley one). Agreement on future funding has now been reached with the trustees of these two schemes and, importantly, their UK Pensions Regulator’s warning notices are likely to fall away. Subject to final settlement early in FY17 and adjusting for FY16 Brunel contributions, Coats expects to make a one-off U$314m cash payment into the two schemes, with US$18m pa recovery payments from FY17. These schemes now have the same covenant and liability guarantee. There are inferred terms for the Staveley scheme (c US$53m one-off payment, c US$4m pa recovery payments) although negotiations are ongoing.
FY17 net debt and positive free cash flow profile
The announcement contained no further comments on current trading so our estimate changes solely concern cash and pensions-related impacts, which take effect from FY17 onwards. In P&L terms, we have increased expected interest costs by US$2m pa. Looking at the cash flow, we now anticipate a c US$112m group net debt position by the end of FY17 (from c US$149m net cash at the end of FY16e). Excluding the one-off pension cash payment, our underlying free cash inflow is now c US$60m in FY17, rising to c US$69m in FY18. Factoring in dividend payments now affects H217 cash flow initially, with a full-year effect from FY18.
Valuation: Multiple attractions
Growing investor confidence has been tangible and the latest pension news has understandably been well received. Consequently, Coats’ P/E rating has risen to 11.3x for the closing year and 10.4x one year out. Cash multiples are on a firmer basis now and the EV/EBITDA (adjusted for pensions recovery cash) for FY17 is 5.5x, falling to 4.9x by FY18. A normalised fully diluted EPS CAGR (2015-2018) of c 9.2%, a US dollar earnings base and, potentially, a more active, outward looking strategy are all investment positives. The prospect of a 3% yield from FY17 is a further attraction.
Exhibit 1: Financial summary
US$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) |
(14.5) |
(14.0) |
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) |
(10.0) |
(10.0) |
Exceptionals |
|
|
(20.0) |
(29.9) |
(2.3) |
0.0 |
0.0 |
Profit Before Tax (norm) |
|
|
128.2 |
126.8 |
135.4 |
141.8 |
149.3 |
Profit Before Tax (FRS 3) |
|
|
96.9 |
79.8 |
118.1 |
131.8 |
139.3 |
Tax |
|
|
(45.1) |
(43.7) |
(46.0) |
(45.4) |
(47.8) |
Discontinued |
|
|
(27.2) |
(75.5) |
0.0 |
0.0 |
0.0 |
Profit After Tax (norm) |
|
|
55.9 |
7.6 |
89.4 |
96.4 |
101.5 |
Profit After Tax (FRS 3) |
|
|
24.6 |
(39.4) |
72.1 |
86.4 |
91.5 |
Minorities |
|
|
(9.6) |
(11.2) |
(11.6) |
(11.9) |
(12.2) |
Profit Attributable to Shareholders |
|
|
15.0 |
(-50.6) |
60.5 |
74.5 |
79.3 |
|
|
|
|
|
|
|
|
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 |
6.1 |
6.5 |
EPS - FRS 3 (c) |
|
|
1.1 |
(3.6) |
4.4 |
5.4 |
5.7 |
Dividend per share (c) |
|
|
0.0 |
0.0 |
0.0 |
1.5 |
2.0 |
|
|
|
|
|
|
|
|
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 |
834.6 |
894.6 |
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 |
349.4 |
395.3 |
Current Liabilities |
|
|
(576.6) |
(437.9) |
(396.8) |
(417.3) |
(437.4) |
Creditors |
|
|
(463.1) |
(417.7) |
(396.8) |
(417.3) |
(437.4) |
Short term borrowings |
|
|
(113.5) |
(20.2) |
0.0 |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(985.1) |
(958.6) |
(1,068.8) |
(730.5) |
(706.2) |
Long term borrowings |
|
|
(304.6) |
(389.1) |
(461.1) |
(461.1) |
(461.1) |
Other long term liabilities |
|
|
(680.5) |
(569.5) |
(607.7) |
(269.4) |
(245.1) |
Net Assets |
|
|
400.6 |
354.0 |
275.2 |
343.2 |
400.0 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
161.2 |
87.7 |
110.6 |
(138.3) |
186.8 |
Net Interest |
|
|
(13.5) |
(5.3) |
(11.2) |
(14.5) |
(14.0) |
JV/Minorities |
|
|
(5.2) |
(10.1) |
(10.5) |
(10.8) |
(11.1) |
Tax |
|
|
(55.7) |
(49.3) |
(46.0) |
(45.4) |
(47.8) |
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 |
(7.0) |
(23.0) |
Net Cash Flow |
|
|
46.6 |
(21.4) |
(43.9) |
(261.0) |
45.9 |
Opening net debt/(cash) |
|
|
(274.3) |
(320.9) |
(240.6) |
(149.3) |
111.7 |
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) |
111.7 |
65.8 |
Source: Company data, Edison Investment Research
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