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Coats Group — Faster growth aspirations

Coats Group — Faster growth aspirations

H117 results provided clear evidence of business momentum with a strategy to accelerate the influence of innovation on future growth rates. Following a series of announcements and the H1 cash flow presentation, the ongoing pension, and therefore group, funding positions are now fully visible. The combination of these points indicates an aspiration to achieve faster group progress, in our view.

Analyst avatar placeholder

Written by

Coats Group

Faster growth aspirations

H117 results

General industrials

9 August 2017

Price

76.40p

Market cap

£1,080m

£/US$1.30

Net debt (US$m) at end June 2017

261

Shares in issue
(includes Treasury shares)

1,412.4m

Free float

97%

Code

COA

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

23.7

156.8

Rel (local)

(2.1)

20.2

130.3

52-week high/low

80.2p

29.5p

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

Ex-dividend H117 interim 0.44c

26 October 2017

H117 dividend paid

17 November 2017

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Coats Group is a research client of Edison Investment Research Limited

H117 results provided clear evidence of business momentum with a strategy to accelerate the influence of innovation on future growth rates. Following a series of announcements and the H1 cash flow presentation, the ongoing pension, and therefore group, funding positions are now fully visible. The combination of these points indicates an aspiration to achieve faster group progress, in our view.

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

20.1

N/A

12/16

1,457.3

140.7

5.8

0.8

17.1

0.8

12/17e

1,488.5

155.8

6.5

1.5

15.3

1.5

12/18e

1,548.6

157.9

6.7

1.7

14.9

1.7

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%.

Encouraging H1 performance

Group revenue and EBIT grew by 4% and 12% respectively, primarily due to the encouraging performance from Industrial operations. Overall finance costs reduced such that adjusted EPS increased by 38% in the period and the payment of a maiden H1 dividend after a return to the dividend list with the FY16 final was another highlight. Pension cash payments dominated balance sheet funding movements in the period, but the underlying cash flow performance was positive and ahead of the previous year.

Clear focus

Management stated that its full year expectations are unchanged. Based on the H1 performance, we have nudged up our estimates for the second time this year. The group pension position is much clearer now; it includes a much-reduced deficit (to US$179m for the three UK DB schemes at the end of June), lower annual recovery payments and the cessation of all warning notices. Consequently, the group balance sheet position and cash flow prospects have also been clarified. Quite obviously, investors will focus more now on business performance and we believe that reasonable momentum is apparent currently. There is, perhaps, more to come from increasing capex and innovation initiatives on a medium-term view.

Valuation: Growing earnings, more expected

Notwithstanding a small post-results retracement, Coats’ share price has performed well since the beginning of the year, rising by c 40% ytd. Our FY17 EPS estimates have risen by 6% over this time period; the current year P/E now stands at 15.3x with an EV/EBITDA (adjusted for pensions recovery cash) of 11.8x. By FY19, these metrics become 14.3x and 7.7x respectively. (Note that £/US$ movements affect valuation multiples.) We expect the dividend yield to rise from 1.5% to 2.0% over our estimate horizon. As previously noted, we believe the market is starting to price in faster earnings growth than the current consensus and, now that the pension position is clearer, this is likely to be the primary valuation driver in our view.

H117 results overview

The robust H1 performance was most notable for increased underlying revenue growth rates in both Industrials subsegments, backed up by a small divisional margin improvement. The headline change in funding position was dominated by pension settlement payments from parent company cash leaving group net debt of c US$261m at the end of June. Underlying cash flow performance should become more visible and we expect Coats to end FY17 with net debt/EBITDA around 1x.

Exhibit 1: Coats Group divisional and interim splits

US$m

H116

H216

FY16

H117

H117 % chg y-o-y

Reported

CER

L-f-l

Group revenue

713

745

1,457

740

4%

5%

3%

Industrial Division

609

612

1,221

642

5%

7%

5%

Apparel & Footwear

494

481

975

507

3%

5%

4%

Performance Materials

115

131

246

135

16%

18%

9%

Craft Division

104

133

236

98

-6%

-8%

-8%

Handknitting

49

72

121

47

-3%

-4%

-4%

Needlecrafts

55

60

115

51

-8%

-11%

-11%

Group operating profit

80

78

158

89

12%

14%

10%

Industrial Division

81

74

155

88

8%

11%

7%

Craft Division

3

8

11

5

79%

79%

79%

UK pension admin costs

-4

-4

-8

-4

Source: Coats Group

Industrial – Apparel & Footwear: l-f-l revenue growth in H117 was around double that achieved in FY16 and, we note, slightly ahead of that for the four-month period ending April reported at AGM time. As the largest subdivision in the group, this is significant. A pricing environment described as “challenging” indicates that most, if not all, of the headline progress was volume driven and market share gains, together with some contribution from new products were the key drivers cited. “Winning with the winners” has been a phrase used by the company in the past and this very much appears to have been the case again as some of the leading brand owners and retailer customers have performed relatively well in their markets. Encouragingly, H117 saw growth in each of A&F’s identified product groups (including zips, trims and accessories) with favourable mix effects also.

Industrial – Performance Materials: as trailed with the AGM update in May, this sector has experienced a marked step-up in underlying revenue growth rates compared to the prior year (ie +9% in H117 versus +3% in FY16). This appears to be more than a rebound from a relatively weak start in US consumer durable demand in H116; Asia and EMEA revenues both grew above the underlying rate, partly attributable to the migration of existing products, as well as following opportunities with existing customers into other territories. No specific new products were highlighted as material contributors to revenue growth in the period, although Synergex (carbon fibre thread applications) was name-checked again as an area to watch. Our sense is that greater intensity is being brought to accelerating development in this segment with both innovation hubs (in the US and Turkey) and the establishment of a Global Innovation Forum indications of increasing focus here. Gotex (cable protection yarns, acquired in June 2016) made a material boost to headline growth rates in the period and this illustrates a further option for adding higher value-added products to the portfolio offering.

Crafts: the impact of previously flagged tornado disruption (affecting warehouse stock and shipments) was restricted to c US$10m of expected revenue. However, loss of profits insurance cover has optically improved the margin performance of this division. There will be a smaller tail of this in H2 and distribution has been substantially reinstated. North American markets have been more steady at lower levels but are considered to be weak, while Latin America has been somewhat better, underpinned by some actions to consolidate operations alongside Industrial ones.

Cash flow and balance sheet clarity

Pension cash flows dominated in H117 but, having agreed settlements with all three UK DB schemes and made the associated one-off payments, the end-June balance sheet is now representative of the financial position of the group going forward. Net debt stood at US$261m including a remaining c US$2m parent company cash, retained for pension settlement expenses.

■

Underlying FCF – H1 EBITDA of c US$109m was c US$10m above the prior year with a more modest working capital outflow also (chiefly a H117 payables inflow versus a H116 outflow). Other normal cash flow items were, in aggregate, in line with H116; interest, tax and minority dividend payments were all modestly lower with capex c US$2m higher (including increasing IT platform spend) at US$19.7m, similar to the combined depreciation/amortisation charge. After accounting for all of these items, the underlying free cash inflow was c US$20m.

■

Acquisitions/dividends – There was no acquisition spend in H117 compared to the c US$40m M&A spending made in the previous year (including the acquisitions of Gotex and Fast React and some residual EMEA Crafts disposal costs). Having returned to the dividend list by declaring an FY16 final, the associated c US$11m cash payment was made in May.

■

Pensions – The DB scheme settlement agreements have been well documented. As previously noted, initial payments were made in FY16. A further US$340m payment was made in H117 concluding the standalone cash injections into all three schemes, including Staveley. As a result, parent company cash balances stood at US$2m at the end of June. It is anticipated that ongoing scheme recovery payments will total US$25m in FY17 before stepping down to US$22m pa (at £/US$1.27) thereafter or c 10 % of EBITDA.

We expect a seasonally strong H2 operating cash performance to be sufficient to fund a step-up in capex in H2 (to c US$55m for the full year) and other normal cash flow items to leave group net debt in the US$210-215m range by the end of FY17. This is above our last published figure being the net product of including the Staveley settlement cash for the first time, partly offset by our improved underlying cash flow expectations. The indicated net debt level would be broadly in line with the EBITDA generated in the year on our estimates.

Edison estimates raised

Management’s expectations for the full year are unchanged, with an emphasis more on internal initiatives rather than particularly supportive markets to achieve this.

Our group revenue estimates are barely changed overall, with increased Industrial expectations more or less offset by Crafts reductions. At the same time, we have nudged up our assumed Industrial margins modestly with a more positive effect on EBIT compared to lowered Crafts margins. Taken together with an associate contribution (where we had not previously expected one) and lower prevailing interest costs – even though our year-end net debt expectation is higher – the overall outcome is a c 4%+ uplift in our PBT forecast for the current year. At this stage, we have not amended the associate or interest lines in our model for subsequent years, so the PBT uplift is more modest. At the EPS level, we have factored in a 33% tax charge for FY17 (up 100bp) in line with the interim level, with FY18 and FY19 unchanged at 32%.

Exhibit 2: Coats Group revised estimates

EPS – fully diluted, normalised (c)

PBT – normalised (US$m)

EBITDA (US$m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2017e

6.4

6.5

+1.7%

149.3

155.8

+4.4%

203.0

212.1

+4.5%

2018e

6.6

6.7

+3.8%

155.4

157.9

+1.6%

207.6

214.9

+3.5%

2019e

6.9

7.0

+3.0%

162.0

164.5

+1.5%

215.2

222.5

+3.4%

Source: Edison Investment Research. Note: Edison normalised includes ‘other’ finance (including borrowing cost amortisation) and excludes ‘other’ (pension net finance costs). Edison norm and Company norm are both shown in Exhibit 3: Financial summary.

Exhibit 3: 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

1,488.5

1,548.6

1,601.0

Cost of Sales

 

 

(993.4)

(930.1)

(892.3)

(911.4)

(948.2)

(980.3)

Gross Profit

 

 

568.0

559.4

565.0

577.1

600.4

620.7

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

14.3

13.9

13.9

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

 

 

7.9

9.4

10.8

11.4

11.3

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

623.2

671.9

721.5

Stocks

 

 

257.8

204.0

205.8

210.2

218.7

226.1

Debtors

 

 

311.6

268.7

255.5

259.7

267.9

275.0

Cash

 

 

739.0

649.9

476.5

153.3

185.3

220.4

Current Liabilities

 

 

(576.6)

(437.9)

(660.3)

(358.6)

(379.1)

(399.6)

Creditors

 

 

(463.1)

(417.7)

(652.6)

(358.6)

(379.1)

(399.6)

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

226.5

288.7

350.8

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

161.2

87.7

75.7

(147.6)

183.5

192.3

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)

(298.5)

32.0

35.2

Opening net debt/(cash)

 

 

(274.3)

(320.9)

(240.6)

(78.2)

213.6

181.6

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)

213.6

181.6

146.5

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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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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.

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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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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Sydney +61 (0)2 8249 8342

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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

Research: TMT

Nanoco — Cadmium to be prohibited from October 2019

Proposed amendments (subject to ratification) to the Restriction of Hazardous Substances Directive (RoHS) by the European Commission recommend a two-year more restrictive extension to the exemption of cadmium in quantum dot displays, subsequent to which the use of any cadmium in electronic devices sold within the EU will be banned. The use of cadmium in lighting products will be prohibited with immediate effect. The judgement has little impact on our investment thesis, as we believe that commercial factors for cadmium-free adoption are already strong.

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