Coats Group: Spinning a yarn and 'connecting for growth'

If you were to skim the FTSE 250 for popular British midcap stocks, then the global industrial thread and consumer textile crafts maker Coats Group (LON: COA) should figure pretty prominently in your research and for good reasons. 

Headline numbers inevitably grab the attention of investors and potential investors alike. In that respect, for 2017, Coats reported an adjusted operating profit of $174m; an uptick of 10% on an annualised reported basis, or a 9% rise on an organic basis year-on-year.

Annual revenue rose to $1.51bn from $1.4bn; signalling organic growth of 3% or a 4% increase on a reported basis, with much of the company's positivity stemming from expansion in its industrial threads business. 

What has also not gone unnoticed is Coats’ growth in emerging markets. For instance, its businesses in India and Vietnam grew 6% and 12% year-on-year respectively, in many ways offsetting a weaker North American market. The overall strong performance also enabled Coats to raise its full-year dividend by 15% to 1.44c.

That said, Coats' share price has oscillated in the 52-week range of 71.65p to 90.00p, with the high mark achieved at the start of 2018, a matter of weeks after the company unveiled a refinancing package and its entry into the US private debt market. 

More broadly speaking, in the year-till-date, Coats shares are down from 88p noted at the start of the trading year (2 January 2018) to 75p at the time of writing this research note (6 July); a decline of just over 17%. 

This is down to various factors. For starters, Coats might well have a rich heritage dating back to the 1750s, but its life as a publicly-listed company has been anything but constant. In its current avatar, as Coats Group, the company has only been on the London Stock Exchange since 2015, which may or may not keep it under fund managers’ radar, but does keep it shy of a five-year examination period many money managers subject dividend yielding stocks to. 

Secondly, while casting a cautiously optimistic eye on Coats’ refinancing and debt moves, the market is yet to give its considered verdict on the issue. Based on public disclosures made on 8 December 2017, Coats issued $225m of US private placement (USPP) notes in tandem with the inking of a new five-year $350m bank facility.

The move replaces Coats' $680m bank facility that was due to mature in March 2020 and includes a mixed bag of notes maturing in 7 and 10 years time. While the new bank facility is with a syndicate of its existing lenders, via the USPP, Coats finds itself in uncharted waters. 

The company fell to a net debt position of $241m from net cash of $78m in 2016 owing to deficit recovery payments made into three UK defined benefit schemes in the first-half of last year after a settlement with trustees. But in the wake of the settlement, the pension deficit also fell to $163m at the end of 2017 from $627m at the end of 2016. 

Finally, the issue of global trade wars, could yet surface to dampen Coats’ takings, something the company is cognisant of, even if the market consensus is that the US-China trade balance skirmish will most likely not escalate into something catastrophic. 

While the company has a market leading position, it is in a cyclical consumer-focussed line of manufacturing. Furthermore, the threads business remains as competitive as ever with American & Efird, Dupont, Service Thread, Amann Group, Somac Threads, Empress Mills and Champion Thread Company, being among the many big names toughing it out with Coats.

For the moment, Coats maintains that its 2018 adjusted operating profits are expected to be "slightly ahead" of previous estimates. 

And alongside organic growth, sits a signature acquisition of Patrick Yarn Mill, a specialist manufacturer of cut-resistant and flame retardant yarns, that Coats acquired in December 2017 for $21m.

"We expect 2018 adjusted operating profits to benefit from the incremental full-year contribution from the Patrick Yarn Mill acquisition, and the anticipated first year benefits from our ‘Connecting for Growth’ programme," says Coats Group Chief Executive Officer Rajiv Sharma.

All things considered, how Sharma's Connecting for Growth initiative pans out might well determine the direction of Coats' share price. The two-year transformation programme aims to simplify operations and digitise the company's business, placing much greater, much needed emphasis on online retail.

The company has also said it would grow its operating margins, via price increases, productivity and procurement gains, as well as "tight control" of its cost base. Doubtless, the market would be casting a keen eye on whether Coats' transformation is as transformative as it has been made out to be by the management.