Coats Group
Edison | Oct 23, 2015 07:15AM ET
Newly independent, seeking growth
Having re-emerged as a newly independent company earlier this year, Coats Group (L:COA) is well placed to build on its industry-leading position. Prospects may not be fully reflected in the valuation until there is greater clarity on pensions. We contend that business development is not constrained here and – on single digit underlying multiples – Coats offers good value.
Building on leading market positions
As the leading producer of industrial threads with an international manufacturing footprint biased towards Asia, Coats is well placed to serve the world’s largest developed and emerging consumer markets, from a low-cost production base. Reinforcing market leadership through product and service innovation, Coats aims to grow ahead of the market by developing high-quality applications in conjunction with customers and build share in speciality thread segments. We believe that the company is not constrained with regard to organic investment in technical development and associated capex requirements. It should also be able to add capability via small acquisitions, should the right opportunities arise.
Cash characteristics and pension context
Coats is clearly a strongly profitable and cash generative business, with an expected net cash position at the end of FY15 of c US$312m and annual free cash flow (adjusted for exceptionals) of US$50m or more. Against this, the total IAS19 pension deficit stood at US$526m at the end of H115, including US$468m across three UK schemes on which Coats has responded to notices served by the UK Pension Regulator. Uncertainties with regard to the quantum and timing of any likely settlement are present, but we believe that underlying valuation metrics remain attractive and business development is not constrained by the position.
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