Coats' margins are improving and its valuation is undemanding

Industrial threads specialist Coats (COA) had to battle through a difficult 12-month period in which the manufacture of garments and shoes dropped by around 20 per cent.

So, even though an organic revenue decline of 14 per cent looks ugly, it provides evidence of outperformance. And a 2 per cent increase in operating profit to $183mn (£144mn) in such circumstances is highly credible. 

A “strategic progress” initiative announced two years ago, which saw it move some operations from high-cost locations to cheaper ones, brought in a further $37mn of cost savings last year, bringing the cumulative total to $57mn. It wants to take this even higher, to $70mn, this year. 

On top of this, a pension deficit that has been a cash drain for years now looks to have been plugged. After making a one-off payment of £10mn in December, the company said it can afford to suspend the payments it was making every month. This “equates to an annual tailwind to free cash flow” of around $30mn, chief financial officer Jackie Callaway said.

A triennial review falls due this month and Callaway said the aim was to “de-risk the scheme in full by removing it from the group balance sheet in a cost-effective manner”, and that it would prioritise a one-off payment to achieve this. 

With the company targeting “modest” revenue growth and a 17 per cent operating margin for this year, things seem to be looking up and the share price rose by 9 per cent. This only brings it to 9 times earnings, below its five-year average of 12 times, a valuation described by Jefferies analysts as “undemanding”. We concur. Buy.

Last IC view: Buy, 72p, 02 Aug 2023