Coats makes progress on cost base

Coats’ (COA) shares bounced by 8 per cent on the back of these full-year results, despite the fact that it reported a 4 per cent decline in pre-tax profit and an 18 per cent fall in earnings per share.

There are several reasons why. Firstly, investors had already been told there would be a hit to its bottom line following the thread maker’s exit from Brazil and Argentina. 

There were other one-off costs, too, as the company completed equity and debt deals to fund the acquisitions of Texon and Rhenoflex for a combined $355mn (£298mn). Both businesses strengthen its presence in what chief executive Rajiv Sharma described as an “attractive footwear market”, offering better medium-term revenue and margin potential.

Coats has also been spending more on a set of “strategic projects”, which have included closing some US factories and relocating to Mexico to tackle labour shortages. It is extending its scope to Asia, particularly China and India. This will increase project costs (from $35mn to $50mn) but also the expected savings (from $50mn to $70mn). Moreover, an initiative to save costs by moving some corporate and back-office functions from “higher-cost UK and US locations” is also delivering better-than-expected benefits. 

When coupled with efforts to remove some of its UK pension scheme liabilities through the purchase of a bulk annuity (covering 20 per cent of scheme members), it’s easy to see why there’s more interest in a business that seemingly offers a much better risk-return profile. And even after an 18 per cent year-to-date uplift, Coats’ shares still trade at 9.4 times RBC Capital Markets’ forecast earnings of 8.37¢ a share – well below their five-year average of 12.8 times. Buy.

Last IC View: Buy, 71p, 16 Feb 2023