The world’s largest thread and sewing materials company is about to be run by a chief executive with little or no experience of that industry. But the newcomer at Coats, David Paja, was head of the GKN Aerospace arm of Melrose Industries — motto “design, deliver, improve”, a touch more prosaic than Coats’s guidelines, “innovation, sustainability and digital”.
Melrose prides itself on “a relentless focus on profitable, sustainable and cash-generative growth” and, while Coats has not been badly managed, these are likely to be on Paja’s immediate to-do list, rather than choosing this season’s must-have shade of thread.
Although most people rarely think of it in these terms, Coats’s products have for years been a staple of fashionable brands such as Nike, Adidas, Puma, H&M, Levi’s and many others. Not only can they be used to make hard-wearing clothes, they give the no-nonsense, casual feel that has long been the direction of travel for clothing and footwear.
In addition, a quarter of group revenue comes from so-called performance materials: fabric for protective clothing and footwear resistant to fire or molten metal. Where appropriate it supplies zips to hold its threads together, subject to the ever-present threat of competition from Japan’s YKK, the colossus of international fasteners.
Coats is the global market leader in 100 per cent recycled thread products, where revenue grew 141 per cent to $159 million in the half-year to the end of June and could top $300 million for the year, against $172 million in 2023. This is more than mere fashion: the analyst Charles Hall at Peel Hunt says: “Sustainable products have moved from being largely irrelevant in 2018 to a key driver of performance.”
That will appeal to Paja, as better housekeeping was a major contributor to the six-month margin improvement from 15.5 per cent to 17.9 per cent, taking adjusted earnings before interest and tax against gross revenue. That is a new high and better than expected. Revenues rose 8 per cent to $741 million, and operating profit was 26 per cent ahead at $133 million. Earnings per share were up a similar amount to 4.5 cents, leaving room for a 15 per cent lift in the interim dividend to 0.93 cents.
It is worth noting that the latest numbers were flattered by industry destocking problems in the same period last year, largely due to the global cost-of-living crisis. Apparel and footwear have returned to normal, but performance materials continue to struggle. Revenue fell 3 per cent to $167 million. The main culprit was composites, down 19 per cent, which the company blamed on destocking by US telecommunications firms.
However, there were hopeful signs in the second quarter, led by orders from the US military and firefighters. From next year up to a net $30 million a year could be saved by moving manufacturing from the US to Mexico, where wages are lower, but these benefits have been delayed by what the firm coyly calls “operational set-up challenges”.
One of the most exciting developments in the next few years is likely to be Coats’s gains from applying artificial intelligence. The company is building a mobile version of the ShopCoats digital system it launched three years ago. Since then the system has processed just under $1.7 billion of customer orders, growing year-on-year.
This chimes with the enlarged role of AI in fashion design where, as The Times reported last week, it could cut design times by 70 per cent, generating dozens of possible combinations without wasting material. While this will use less thread in the short term, it will eventually stimulate demand as shoppers will be able to stipulate exactly what they want and have it produced on demand and cheaper.
The board expects 2024’s results to be modestly above the previous analysts’ consensus of $261.1 million adjusted operating profit, with a range of $256.3 million to $266.5 million. Hall at Peel Hunt sees adjusted pretax profit moving from $205 million last year to $300 million in 2026. At a 95p share price, that would bring the price-earnings ratio down to 10 and raise the dividend yield to 3.2 per cent.Advice BuyWhy New chief executive adds energy as recovery gets under way.
Norcros is one of those companies that seems to have been on the stock market for ever, not making any transformational deals yet dodging predators despite the shares’ modest rating and a clutch of potentially promiscuous institutional shareholders. It is a leader in upscale showers and bathroom and kitchen accessories, selling mainly to other firms down the housebuilding and DIY chains.
The Cheshire-based group, looking to drive growth through its commitment to net zero in an increasingly eco-conscious market, trades in the UK mainly under the brands Triton, Merlyn, Croydex and Abode. Triton Showers, with half the UK market, recently received a King’s Award for Enterprise for sustainability credentials.
Norcros also has a South African business that contributed 28 per cent of group turnover, down from £441 million to £392 million, but only 11.1 per cent of operating profit in the year to last March 31. A declining home-improvement market and still-stagnant housebuilding have been dragged back progress, taking underlying pretax profit from £41.8 million to £36.4 million, and diluted earnings per share from 37.4p to 32.1p. Nevertheless, that left plenty of room to maintain a 10.2p dividend.
The South African-born chief executive, Thomas Willcocks, appointed last year, said: “Our strategy is building from a position of strength and scale as we actively leverage the customer and operational synergies within the group.” Since the year end the firm has sold Johnson Tiles UK.
His medium-term targets are organic growth 2-3 per cent above the market, a 15 per cent underlying operating profit margin, cash conversion greater than 90 per cent and better than 20 per cent return on capital employed. If he achieves those, in what he admits are uncertain markets, shareholders should be satisfied.
The shares have been reviving in line with the UK economic recovery, so this may be the right point in the cycle to invest. This column recommended buying at 176p two years ago, and since April the shares have surged as high as 245p, pausing for breath in the past couple of weeks and ending the day yesterday up 4 per cent at 229p. Not demanding, on a 7.6 price-earning ratio and 4.1 per cent dividend yield.Advice BuyWhy A good-value bet on economic recovery