Buy into new-look Coats

Coats has reorganised itself into two segments, both of which generate similar operating margins. Its apparel and footwear division accounted for 77 per cent of first-half sales and, as well as selling things such as thread and zippers, offers software solutions and services to its clients. The division is a global leader, with 20 per cent market share and it aims to use its scale to gain a competitive edge through efficiency and innovation, including addressing growing calls for the textile industry to become more sustainable. 

The group’s other division, performance materials, serves a series of niche markets in areas ranging from fibre-optics, to energy, to automotives. Adjusting for currency movements, first-half sales were up 1 per cent at apparel and footwear and 4 per cent at performance materials, and were ahead by 2 per cent for the group as a whole. However, a reported 3 per cent revenue fall highlighted the group’s exposure to currency movements. Geographically, Asia is the group’s largest market, accounting for 56 per cent of first-half sales, followed by the Americas at 24 per cent then Europe, the Middle East and Africa (EMEA).

The decision to reorganise into the two new reporting divisions has accompanied a costs-cutting push by Rajiv Sharma, who has been chief executive since the start of 2017. Coats has exited seven ‘tail markets’ and ceased carrying out unprofitable work for customers as part of its revamp, which should deliver savings of $25m (£20.5m) in 2019, with total restructuring costs for the programme, which is scheduled to end this year, expected to come in at $30m. The benefit of the actions being taken was reflected in an increase in the first-half underlying operating margin from 13.7 per cent to 14.5 per cent, and margins are up from 9.5 per cent since 2015. The first-half improvements came despite rising input and operational costs.

The focus on cost savings has not stopped the company investing, with capital expenditure for this year earmarked at $45m-$55m. Spending is focused on product innovation, digital capability, talent and sustainability. Two innovation hubs have recently been opened, as has a waste treatment plant in Mexico. The group is also targeting bolt-on acquisitions. It acquired Indian business Threadsol in February, which provides software solutions to the apparel industry and which will help it optimise its fabric usage and further strengthen cost discipline.

The sale of Coats’ North American Crafts business in February brought in $37m, which has helped get net debt down to 0.9 times cash profit, which is below a target of one to two times. While this should give the group scope for continued investment while pursuing its progressive dividend policy, Coats’ balance sheet is not without issues, namely a gaping pension deficit. Following a triennial review, Coats is having to make pension top-up payments of $20m a year, plus annual admin payments of $4m. This noteworthy drain on cash flows is scheduled to continue until the end of 2028.