Coats Share Discussion Threads

[manurere] 16/8/2022 09:07

I am not sure how many of you receive Coats email notices; they are worth subscribing to.

Yesterday I received one that outlined the directors' uptake of the recent share offer, which I can confirm was at 63.5 pence/share:

David Gosnell (Chair): 157,480;
Rajiv Sharma (CEO and Director): 157,480;
Jackie Callaway (CFO and Director): 118,110
Jakob Sigurdsson (Independent Director): 47,244;
Fran Philip (ID): 25,984;
Nicholas Bull (ID): 50,000;
Hongyan Lu (ID): 7,874.

The positive from this is that all directors showed faith in the company and its future.

The negative, which I am sure will grate with UK-based investors, is that insiders had an opportunity that many other, UK-based, retail investors seem not to have had.

On 13 August there was a notification that Blackrock --one of the world's largest institutional investors-had increased its shareholding from 5.0% to 5.6%.

It is not entirely clear if this was via a UK-based entity or an off-shore entity.

I infer that the additional shares were purchased in the market and not through the capital raising.

Looking ahead, I agree completely with EI's recent posting. The shares do indeed look cheap, but it will not be until we get the full year results for 2024 that we will know how well the Board and Management can deliver the forecast earnings.

[theoriginalwonderstuff] 12/8/2022 16:12

Thank you all. Personally I can't find any evidence that my nominee share dealing account even offered me the opportunity to partake in the offer.Anyway, it is what it is... Time will tell if the placing was a good thing...Hope all have a pleasant weekend!

[essentialinvestor] 12/8/2022 11:14

On holiday this week and completely missed the announcement on the day and retail
offer, which through ii I could have subscribed for.

Firstly, astute not to pay for this through extra debt, although the placing shares
are dilutive meaning increased profitability needs to offset.

On current consensus, which is clearly subject to change (including FX movements)
COA sells on approx 7.5 X FY 2024 EPS.

IF, emphasis on if, that can be achieved, then Coats is very, very
cheap - but we are looking over 2 and a half years away on those earnings estimates.

They have geared up the balance sheet funding Texon through debt, only fair
to mention. Now COA the BOD need to deliver.
And at a time where wider macro is weakening.

[manurere] 12/8/2022 10:38

My partner and I each own heaps of Coats shares big we had been eligible, we too would have bought more.
That said, I can see why the Board opted for this approach. A general one for 10 offer to shareholders would have been expensive and would probably have required a lot of compliance to meet US and other jurisdictions’ requirements.
It seems that the market is happy with the placement.
As I have commented previously, I am a supporter of the ‘bolt on’ acquisition strategy Coats is pursuing.
Management and the Board appear to have a very clear sense of which acquisitions will help consolidate market strength at the higher quality/ higher margins end of the market.
If the strategy improves to be sound, then we can expect better returns.

[niklol] 12/8/2022 06:45

Thanks for your reply.
I would have bought at that price.
Too late now.

[manurere] 11/8/2022 18:55

I believe it was 63.5p. As a non-UK investor, I wasn’t eligible. It was basically an insiders’ deal as far as retail investors were concerned. But I am not overly annoyed. It raised capital quickly and efficiently. The company is expanding I expect the benefits to show through in share price and dividends.
The share price is already above the issue price and will probably move back into the 70p zone fairly soon.
I think we retail investors just have to suck up this one. Yes, we got stiffed a bit. But we need to take a broader view.

[niklol] 11/8/2022 08:39

Yes via email from HL yesterday afternoon.
The time I read it it the offer had closed! No idea how much the share offer was. Anyone know?

[theoriginalwonderstuff] 11/8/2022 08:35

Did anyone get an opportunity to buy shares as part of the capital raising/share issuance? I didn't and wonder why, as the RNS mentions that there was a retail offer element.

[justiceforthemany] 10/8/2022 17:53

Thoughts on the acquisition? Explains pull back. People were in the know again.

[manurere] 03/8/2022 00:02

Agree, EI. Always going to be some short-term profit takers out there.
I also thought that thevCEO’s comments were intended to keep in check shareholders’ expectations.
One also has to recognise a point you were making a while back; that is, that markets generally have been cautious for some time and that in that context, the Coats price has done well.

[essentialinvestor] 02/8/2022 17:17

Need to be a little realistic here, by Friday COA was Up about 20% in 4 weeks.

Some give back perhaps overdue.

[our haven] 02/8/2022 13:17

Manurere, not a great response so far today from the market but looks a comfortable hold to me.

[manurere] 02/8/2022 07:56

Very good results. Nice, modest lift in dividend. Future prospects look very positive. Good stick to hold. Now waiting to see immediate market response.

[our haven] 02/8/2022 07:51

15 percent rise in the dividend reflecting their confidence in future results. Moderately ahead of expectations, a good set of results.

[our haven] 01/8/2022 14:01

Reporting tomorrow, fairly hopeful that it will be positive.

[cravencottage] 22/7/2022 22:18

No Probs :-)

[manurere] 22/7/2022 21:41

CC, that was a very, very helpful contribution. Thanks

[cravencottage] 22/7/2022 19:24

Here's what the I/C had to say in back in April..

Coats is back in fashion
The industrial thread company’s growth is sustainable in more ways than one
April 7, 2022
By Jemma Slingo


Those in search of threads, yarns and trims might visit a local haberdashery. The idea feels quaint in 2022, where sewing has largely been replaced by shopping. There is nothing quaint about thread manufacturing, however. The lucrative industry literally holds together swathes of the retail sector, and promises to be a reliable source of returns for investors.

IC TIP:
Buy
Tip style
GROWTH
Risk rating
MEDIUM
Timescale
MEDIUM TERM
Bull points
Convincing growth opportunities
Large market share
$50mn cost-saving drive
More demand for sustainable thread
Bear points
Tight US labour market
Inflationary pressures
Uxbridge-headquartered Coats (COA) might not be a household name, but it is the world’s leading manufacturer of threads, yarns, zips and trims. In the world of apparel and footwear, it has a 23 per cent market share, and is estimated to be over twice the size of its nearest thread competitor.

Its smaller ‘performance materials’ arm – which produces thread for an eclectic range of purposes, including personal protection, telecoms, and transportation – also has a chunky market share of around 14 per cent.

COA:LSE
Coats Group PLC

1mth
Today change
3.30%Price (GBP)
72.10
Coats’ size and history is crucial to its investment case. The group has been around since 1755, boasts well-established manufacturing processes, and counts on long-standing customer relationships, meaning new entrants to the market are unlikely to prove a threat.

Its broad portfolio also shelters it from the volatility of fashion retail. Its apparel and footwear division targets a variety of markets including premium lifestyle, fast fashion, mid-market, and luxury attire. Because of this, fickle consumer taste – often the downfall of retail brands – has little impact on demand for its products.

But it hasn’t all been plain sailing. Coats had a difficult lockdown, when profits were hit by a drop in demand and additional coronavirus costs. However, the group bounced back well in 2021, when sales and cash exceeded pre-pandemic levels, and operating profit edged toward past highs. Momentum also seems to be building. The final two months of 2021 saw sales up 20 per cent versus 2019 in both divisions, compared with 1 per cent in the first half of the year.




Opportunities in Asia
Over the past decade, Coats’ customer base has shifted away from Europe and into Asia. Asian countries – particularly India and China – are now expected to drive sales. In its latest annual report, the group said that sewing thread markets are due to grow by low single-digit percentages globally in the medium term. However, growth in Asia is expected to be faster, as consumers become wealthier and urbanisation increases demand for products such as fibre optic cables, which Coats’ performance materials division also specialises in.

“Not only will Asian consumers demand more garments, but more affluent consumers will demand higher-end garments, so we expect regional sales from our factories in Asia to increase over time,” management said in 2020.


Vietnam is also an important player. The country is a key end market for Coats as many of its clients have factories there. A series of strict Covid lockdowns resulted in serious operational disruption, particularly in 2021, when Coats had to temporarily shut its Vietnam site. The situation seems to have improved since then, although other shut-downs in Asia cannot be ruled out.



Sustainable sewing
Geography is not the only thing working in Coats’ favour. The group is also tapping into sustainability trends. As flagged in our recent Alpha report on the company, the apparel and footwear industry is a major polluter and retailers are under pressure to go green. Historically, synthetic threads have been an oil byproduct, so eco alternatives are likely to have a competitive advantage.

At the moment, this side of Coats’ business is small. Its ‘EcoVerde̵7; range – which is made from recycled plastic bottles – contributed just 6 per cent to group revenue in 2021. However, it’s growing fast: sales are up 159 per cent compared with 2020, and management wants all of its premium polyester threads to be made exclusively from recycled material by 2024. This would equate to around a third of sales.

The group has also repurposed its Asian ‘innovation hub’ to focus on new biomaterials, and launched a new product in 2021 made from sustainably sourced wood pulp.

As well as ticking the ESG box, this is an exciting opportunity to grow margins and market share. Analysts at Jefferies say Coats’ focus on sustainability is “core to [its] positive thesis”, and believe it will help to raise higher absolute profit per unit.



Efficiency drive
It might sound unduly optimistic to discuss margin improvements against a backdrop of inflation, tight labour markets and supply chain chaos. Coats is far from immune from these pressures, as the decline in its PM division’s operating margins since 2019 shows. This is largely due to its US operations, which are dogged by worker shortages and rising wages.

Management seems to have a plan, however. In early March, Coats announced a cost-saving scheme which promises to deliver incremental adjusted operating profit of $50mn by 2024. How exactly it will achieve this is a little hazy – the group refers simply to “strategic projects” that will optimise the business’s portfolio and footprint. However, broker Peel Hunt suspects Coats will focus on performance materials and – in a move straight out of the modern manufacturer’s playbook – increase production from lower-cost locations, such as Mexico or further afield.

This does not come without its own risks. Part of the strength of Coats’ business model is its global footprint, and the flexibility of its supply chain. Many of the group’s performance materials customers are based in the US, which has so far prevented significant offshoring. It is hard to shake the sense, therefore, that management’s hand has been forced.

However, analysts are excited by the cost-saving possibilities. While the efficiency drive is expected to incur a one-off cash cost of $35mn, Jefferies expects it to boost consensus earnings before interest, tax, depreciation and amortisation by 9 per cent in 2023 and 2024, and result in margin accretion of two percentage points.



Decent valuation
For some investors, a question mark hangs over the profits that will flow to shareholders. The shares have jumped by around a third since the end of February, driven by a strong set of annual results. But the stock sits on less than 13 times forward consensus earnings, and sentiment still remains tainted by historic issues with its group pension arrangements.

While the words ‘defined benefit scheme’ often cause investors to break out in a cold sweat, in the case of Coats things aren’t too bad. The group moved from a deficit of $226mn to a surplus of $21mn in 2021, largely due to higher discount rates and employer contributions.

Future contributions will remain at the previously agreed level of £22mn a year, meaning that the deficit should be paid down by 2028.

These contributions will inevitably impact Coats’ cash position. However, the end is well in sight and the group generated an impressive amount of cash in 2021, despite having to catch up on some payments it deferred at the start of the pandemic. As such, it managed to reduce its net debt (excluding lease liabilities) by almost $35mn, and increase its dividend.

Coats seems to offer an attractive combination of value and growth, therefore – and its performance this year suggests that industrial thread is firmly back in fashion.

2021 1.50 160 6.81 1.44
f'cst 2022 1.56 186 7.70 1.64
f'cst 2023 1.63 210 8.81 1.84
chg (%) +4 +13 +14 +12

[essentialinvestor] 22/7/2022 18:16

If you hold in quantity and speak with the the Investor IR,

they may send you a copy of a note or two.


It was much easier back in the day, you could blag all sorts of stuff,
everything more regulated now and their clients are obvs paying for that research.

[manurere] 22/7/2022 18:13

Agree, EI.
Although much analyst and broker comment is behind paywalls, the general sentiment is very positive in the wake of the Texon acquisition.
Seller sentiment has also shifted. A couple of weeks ago, you noted the number of sellers prepared to accept below 70 pence.
That’s shifted.
Recent trading volumes suggest that potential sellers now want more than 70 pence; I wouldn’t be surprised if we see a sustained trading range of 75 to 80 pence by the end of the month. We may even go over 80p.
However looking ahead, I am still of the view that it will take positive financial reports over the course of 2023 to push the share price closer to 100p.
That said, one or two more smart, ‘bolt on’ acquisitions could trigger a quicker, positive share price movement.
I am also looking for some good news in 2023 with respect to industrial materials. I believe that is where we will eventually see significant growth in revenue, earnings, profits, and dividends.
Overall, if one is going to be invested in medium cap, global
manufacturing, Coats remains a very good option.

[essentialinvestor] 22/7/2022 17:00

One of the best individual weeks I can remember for Coats - Up over 13%.

[essentialinvestor] 21/7/2022 12:31

What a week.

[essentialinvestor] 07/7/2022 13:00

Plenty of sellers for many stocks right now!.

Also keep in mind Coats trading under 60 pence in Feb/early March,

before much of the wider equity weakness began.