Coats Share Discussion Threads

[manurere] 02/8/2022 06:56

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 06:51

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 13:01

Reporting tomorrow, fairly hopeful that it will be positive.

[cravencottage] 22/7/2022 21:18

No Probs :-)

[manurere] 22/7/2022 20:41

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

[cravencottage] 22/7/2022 18:24

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 The idea feels quaint in 2022, where sewing has largely been replaced by shopping.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 17:16

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 17:13

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 16:00

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

[essentialinvestor] 21/7/2022 11:31

What a week.

[essentialinvestor] 07/7/2022 12:00

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.

[manurere] 07/7/2022 09:01

Thanks EI or the analyst call tip, I will follow that up. The market this morning (UK time) still seems to like the deal. It also seems that there are not a lot of sellers out there right now.

[essentialinvestor] 07/7/2022 06:09

Manu, as you are holding Coats, the analyst call (link above) is well worth a listen -
a Q&A following the CEO and CFO comments.

[manurere] 07/7/2022 00:33

Texon is indeed a chunky acquisition.

Initially,I was surprised at the size of the deal and the price paid. I was also unclear as to the extent to which the purchase complements Coats' present manufacturing.

Further research suggests that Texon is a good fit and that Coats has not paid too much.

First, one site reminded me that back in January Coats unveiled a new technology for creating footwear composites that sped up the manufacturing process and reduced waste.
Another informed me that Texon produces structural components, including fabric woven components for brands such as Clarks, New Balance, Nike, Decathlon, VF Corp and Wolverine. Yet another site highlighted Reebok and Timberland as Texon customers. That all sounds pretty compatible with Coats.

Second, I learned from a combination of other sites that in April 2016 Navis (the vendor) purchased Texon from Barclays Ventures (part of Barclays Bank) for somewhere between $75 million and $125 million. The suggestion is that it was closer to the latter figure.

In April 2022, it was reported that Navis had revised plans to sell Texon for around $300 million. At the time it was reported that Mirae Asset Management, a financial services group based in South Korea, was a possible buyer. There were also suggestions in the Korean media that other private firms were also considering the acquisition.

Given the above, it seems that Texon is good fit. It also seems that Coats did not pay too much.

The immediate market response tends to confirm these conclusions.

[roguetraderuk] 06/7/2022 15:27

im not involved in that many, the lists ive got on the screens are more to judge sentiment and momentum in sectors and markets. usually own 20-40.

[essentialinvestor] 06/7/2022 14:50

Getting some support.

[essentialinvestor] 06/7/2022 12:44

Link for the analyst call, quick registration is required.


Their head of IR is efficient, replied to my e-mail requesting this within a few mins.

[essentialinvestor] 06/7/2022 12:08

rogue, guessing you may follow more stocks than me!!.

[roguetraderuk] 06/7/2022 12:00

thks EI youve just reminded me i asked the bank to add it to the list along with a few others but they havent done yet.

[essentialinvestor] 06/7/2022 11:28

rogue, IMI may be worth a look on a bad day, appears to bounce pretty regularly,
but would be surprised if yesterday was a significant low for wider markets,
perhaps more a case of how soon to the next decline?.


There is a analyst presentation on today's acquisition, assume it's available
to view on the IR site, not had a look yet.

[roguetraderuk] 06/7/2022 11:22

picked some up on the open. new possie so just a first buy. watching the techs today to see if they can follow thru on yest and maybe the rates story can provide a long mini bounce before lower again as corps start to guide lower.

[essentialinvestor] 06/7/2022 11:12

Chunky acquisition in what is a nice growth segment.

[essentialinvestor] 01/7/2022 08:00

We are in a bear market to be fair.

[manurere] 01/7/2022 07:46

Smart move to add. If I had spare cash--I did have six weeks ago, but placed it elsewhere--I'd be buying more Coats, even though I hold a large number. I certainly didn't expect the price to slump this far. However, the slump doesn't undermine my long view. Having said that, I am glad I don't have to cash up for any reason.

[essentialinvestor] 30/6/2022 14:35

Added, lower levels more than possible if this bear market turns increasingly nasty.