Coats ups dividend, flagging ‘positive momentum’

Industrial threads manufacturer Coats (COA) had already revealed in mid-July that performance this year would be moderately ahead of prior expectations. But that didn’t stop the shares from edging up 3 per cent as the FTSE 250 company published its results for the six months ending 30 June, citing “continued positive momentum” in spite of ongoing Covid-19 restrictions in some of its key markets.

On an organic basis, revenues were up 1 per cent versus 2019 (before the coronavirus pandemic took hold). Coats’ core thread business improved by 2 per cent versus 2019 and by more than two-fifths versus 2020, helped by a recovery in apparel and footwear and improving sentiment in the US, Europe and Asia.

Further down the income statement, well-documented inflationary pressures in labour and raw materials were offset by steps including price increases in the US. But labour availability challenges across the Atlantic contributed to a 7.2 percentage point decline in the operating margin versus 2019. Roughly 2.1 percentage points of that fall was attributed to the dilutive impact of Coats’ acquisition of Pharr High Performance Yarns (Pharr HP) in February last year.

Including lease liabilities, net debt increased slightly from $247m to $264m. But lending weight to management’s tone of confidence, Coats opted to declare a 0.61¢ dividend after skipping a payment in the first half of 2020.

FactSet consensus forecasts put operating profits at $183m for 2021, rising to $201m in 2022, up from $111m in 2020. The data provider puts Coats’ PEG multiple (PE/growth) at 0.8, implying that its valuation may not currently reflect the potential growth on offer. Buy.

Last IC view: Buy, 58p, 14 Aug 2020