Seamless return to form for Coats

After a tough lockdown, industrial threads manufacturer Coats (COA) is back on track. Sales and cash exceeded pre-pandemic levels in 2021 and operating profit is edging closer to past highs. 

The group’s apparel and footwear (A&F) division has bounced back strongly after experiencing significant disruption to supply and demand in 2020. Revenue rose by a third during the year to over $1.5bn (£1.14bn), most of which came from Asia. Meanwhile, A&F’s adjusted operating operating profit overtook 2019 levels, reaching $164mn.

Management also noted strong thread market share gains in A&F, from 2 per cent to a hefty 23 per cent. 

Coats’ performance materials arm – which manufactures threads and zips for protective clothing and uniforms – is taking a little longer to recover. While the group said it has won new customers, the division’s adjusted operating margin has shrunk during the pandemic. As such, while sales rose by $83mn compared with 2019, adjusted operating profit fell from $42mn to $29mn.

Inflationary pressures seem to pose an obvious threat to manufacturers such as Coats. However, management said swelling costs were absorbed by price rises and “self-help productivity programmes”. Indeed, the group is poised to embark on an efficiency drive which is due to save $50mn by 2024.

Analysts at Jefferies expect the cost savings to boost consensus Ebitda by 9 per cent in both 2023 and 2024, and result in margin accretion of two percentage points. 

The company also generated a lot of cash in the period, managing to reduce its net debt (excluding lease liabilities) by almost $35mn, and increase its dividend. Coats is now well positioned to benefit from increased demand, particularly as customers and consumers look for more sustainable options. Buy.

Last IC View: Buy, 73p, 3 Aug 2021