Coats Group — Update 19 December 2016

Coats Group — Update 19 December 2016

Coats Group

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Coats Group

Pensions progress and dividend returns

Pensions update

General industrials

19 December 2016

Price

50.3p

Market cap

£708m

US$1.26:£

Net cash (US$m) at end June 2016

59.1

Shares in issue

1,407.6m

Free float

97%

Code

COA

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

31.2

62.9

108.3

Rel (local)

26.7

57.2

83.4

52-week high/low

50.3p

21.2p

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 66%) and Speciality (c 15%); and Crafts (19%), based on FY15 revenue.

Next events

FY16 results

24 February 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

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*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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 2016. “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.

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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 2016. “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.

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

Consort Medical — Update 19 December 2016

Consort Medical

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