Coats Group — Update 19 November 2015

Coats Group — Update 19 November 2015

Coats Group

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Coats Group

On track for FY15 progress

Trading update

General industrials

20 November 2015

Price

25.00p

Market cap

£352m

£/US$1.52

Net cash (US$m) at end June 2015

234

Shares in issue

1,407.6m

Free float

97.4%

Code

COA

Primary exchange

LSE

Secondary exchanges

ASX, NZX

Share price performance

%

1m

3m

12m

Abs

(15.3)

(9.1)

(5.7)

Rel (local)

(15.2)

(8.0)

(2.9)

52-week high/low

30.0p

20.5p

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 (c 64%) and Speciality (c 16%) – and Crafts (20%) based on FY14 revenue.

Next events

FY15 year end

December

FY15 results

February 2016

AGM

18 May 2016

Intended delisting from ASX, NZX

24 June 2016

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

Recent group trading has been broadly in line with H1, albeit with some variation within the detail. Our estimates are unchanged and will be reviewed again at the year end. P/E multiples remain in single-digits from FY16. We note Coats’ intention to delist from ASX and NZX next year.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

1,561.4

128.2

5.2

0.0

7.3

N/A

12/15e

1,519.5

112.3

4.1

0.0

9.3

N/A

12/16e

1,571.7

133.1

5.5

0.0

6.9

N/A

12/17e

1,633.5

144.1

6.3

0.0

6.0

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Continuing operations only.

Some variations noted in H2 trading (4M to October)

In the four months to end October, group revenue was c +3% y-o-y in local currency versus c +4% seen in H1, with a firm US dollar having a slightly more adverse y-o-y impact in the period. Operationally, the rate of Apparel & Footwear progress looks to be slightly better, while Crafts saw flat l-f-l revenues in the latest trading period, improving from c -7% in H1. Speciality threads’ l-f-l revenue was also flat over the last four months but followed a strong H115 (+12.8% y-o-y). Weaker activity in the oil & gas and Chinese auto industries is cited as the reason for this (in Coats’ case affecting fire-resistant aramid garment thread and airbag/interior thread demand respectively). By implication, progress in other speciality categories has balanced out these soft spots and auto generally (ex-China) is understood to be performing well. At group level, management still expects to report operating profit progress for the full year. Our existing FY15 estimates (ie revenue -2.7% and EBIT +5.3%) may now be more towards the upper end of the achievable range but we leave them unchanged for now. We will review this and cash flow projections (see below) at the year end.

Brunel progress, other non-trading issues unchanged

Coats has agreed to pay US$8.5m annual cash recovery payments into the Brunel pension scheme (previously nil), starting in FY15. This is subject to review by the UK pension regulator, who has also responded to comments on the Staveley scheme. This dialogue is ongoing. Also, there is no new indication on timing for the expected joint consideration of all three UK schemes. There is no fresh newsflow to report on the US environmental case either (Lower Passaic River). For the record, we have no new expected exceptional charges in FY15 and a discontinued P&L line estimated to be c US$70m for the year (including over US$50m in H115).

Valuation: Still on single-digit multiples

Coats’ share price is little changed over the last month or so. Hence, the valuation analysis in our October initiation note remains valid (accepting that the Brunel payments will lower cash flow, other things being equal). The catalysts for future share price performance continue to be earnings momentum and greater clarity on and/or resolution of the legacy issues referenced above.

Exhibit 1: Financial summary

US$m

2014

2015e

2016e

2017e

December year end

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

 

 

1,561.4

1,519.5

1,571.7

1,633.5

Cost of Sales

 

 

(993.4)

(952.1)

(984.8)

(1,023.6)

Gross Profit

 

 

568.0

567.4

586.9

609.9

EBITDA

 

 

170.0

173.8

187.1

200.1

Operating Profit (before GW and except.)

123.4

130.0

140.0

149.5

Net Interest

 

 

(8.7)

(6.0)

(8.0)

(6.5)

Other finance

 

 

13.5

(11.7)

1.1

1.1

Intangible Amortisation - acquired

 

 

0.0

0.0

0.0

0.0

Pension Net Finance Costs

 

 

(11.3)

(17.2)

(17.2)

(17.2)

Exceptionals

 

 

(20.0)

(12.5)

(5.0)

0.0

Profit Before Tax (norm)

 

 

128.2

112.3

133.1

144.1

Profit Before Tax (FRS 3)

 

 

96.9

82.6

110.9

126.9

Tax

 

 

(45.1)

(41.7)

(45.3)

(46.1)

Discontinued

 

 

(27.2)

(69.6)

0.0

0.0

Profit After Tax (norm)

 

 

55.9

1.0

87.8

98.0

Profit After Tax (FRS 3)

 

 

24.6

(28.7)

65.6

80.8

Minorities

 

 

(9.6)

(10.0)

(10.0)

(10.0)

Profit Attributable to Shareholders

 

 

15.0

(38.7)

55.6

70.8

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

1,407.4

1,406.3

1,406.3

1,406.3

EPS - normalised (c)

 

 

3.3

(0.4)

5.5

6.3

EPS - continuing normalised FD (c)

 

 

5.2

4.1

5.5

6.3

EPS - continuing normalised FD Coats (c)

 

3.1

3.8

4.3

5.0

EPS - FRS 3 (c)

 

 

1.1

(2.8)

4.0

5.0

Dividend per share (c)

 

 

0.0

0.0

0.0

0.0

 

 

 

 

 

 

 

Gross Margin (%)

 

 

36.4

37.3

37.3

37.3

EBITDA Margin (%)

 

 

10.9

11.4

11.9

12.2

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

7.9

8.6

8.9

9.2

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Fixed Assets

 

 

653.9

635.1

630.0

621.5

Intangible Assets

 

 

256.7

256.5

248.7

240.9

Tangible Assets

 

 

298.2

283.9

286.6

285.9

Pension Surplus

 

 

51.0

49.2

49.2

49.2

Other

 

 

48.0

45.5

45.5

45.5

Current Assets

 

 

1,308.4

1,213.3

1,277.0

1,355.7

Stocks

 

 

257.8

220.4

228.0

236.9

Debtors

 

 

311.6

252.7

260.1

268.9

Cash

 

 

739.0

740.2

788.9

849.9

Current Liabilities

 

 

(576.6)

(414.6)

(437.6)

(456.9)

Creditors

 

 

(463.1)

(414.6)

(437.6)

(456.9)

Short term borrowings

 

 

(113.5)

0.0

0.0

0.0

Long Term Liabilities

 

 

(985.1)

(1,050.5)

(1,027.5)

(1,004.5)

Long term borrowings

 

 

(304.6)

(439.5)

(439.5)

(439.5)

Other long term liabilities

 

 

(680.5)

(611.0)

(588.0)

(565.0)

Net Assets

 

 

400.6

383.3

441.9

515.7

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

Operating Cash Flow

 

 

158.4

106.4

151.1

162.6

Net Interest

 

 

(13.5)

(6.5)

(8.0)

(6.5)

JV/Minorities

 

 

(5.2)

(7.0)

(7.0)

(7.0)

Tax

 

 

(55.7)

(41.7)

(45.3)

(46.1)

Capex

 

 

(37.4)

(39.7)

(42.0)

(42.0)

Acquisitions/disposals

 

 

0.0

(5.2)

0.0

0.0

Financing

 

 

0.0

(1.9)

0.0

0.0

Dividends

 

 

0.0

0.0

0.0

0.0

Net Cash Flow

 

 

46.6

4.5

48.8

61.0

Opening net debt/(cash)

 

 

(274.3)

(320.9)

(300.7)

(349.4)

HP finance leases initiated

 

 

0.0

0.0

0.0

0.0

Other

 

 

0.0

(24.7)

0.0

0.0

Closing net debt/(cash)

 

 

(320.9)

(300.7)

(349.4)

(410.4)

Source: Company accounts, Edison investment Research. Note: Other finance includes JV income and FX gains/losses on cash balances. Edison norm includes FX gains/losses on cash balances but excludes pension net finance costs.

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

National Grid — Update 18 November 2015

National Grid

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