A sea change looming for Coats

The Investment Column
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The Independent Online
Take a company operating in mature, cut-throat markets, subject to hugely volatile raw material prices, and you have a pretty accurate picture of Coats Viyella's struggle over recent years. It is, therefore, hardly surprising that the shares have underperformed the rest of the market by more than 40 per cent over the past five years. Like most of the rest of the UK textile industry, Coats has been tardy at addressing the threat from overseas competition. But the group has been spurred into action by the looming demise in 2005 of the multi-fibre agreement, the textiles trade treaty that has protected high-cost Western producers.

A pounds 55m restructuring will see a further massive transfer of Coats' production from the developed to the developing world. By 2000, about 40 per cent of its clothing sales to Marks & Spencer - worth about pounds 300m - will be coming from abroad, up from 20 per cent now. While that will deliver cost savings, Coats will still have to run to stand still, as yesterday's half-year figures to June showed.

The 34 per cent slide in headline pre-tax profits to pounds 47m was heavily impacted by the pounds 17.2m cost of the first phase of the restructuring taken in the first half. But even without that, operating profits still slumped by a disappointing 11 per cent to pounds 78m. Yet again, the group has failed to fire on all cylinders, with Brazil and Turkey turning down again after last year's continued strong recovery from previous problems. Together they accounted for pounds 5m of the pounds 8.5m downturn in pre-exceptional profits to pounds 48.6m in the thread division, which accounts for close to half the group's business.

Even so, how Coats addresses its difficulties in developed markets will be more important for its future. This year's profits will bear the full restructuring cost of pounds 55m, including pounds 32m to be spent in the European thread operations. Cost savings should rise from pounds 10m this year to pounds 35m by 1998, but Coats admits that competition will mean that only pounds 20m to pounds 25m actually hits the bottom line.

Short-term, the prospects are looking up, led by the US and UK. Profits were 16 per cent ahead across the Atlantic, while in the UK there are clear signs of an end to the destocking and gloomy housing markets. With raw material prices returning to more normal levels, the pounds 5m hit on costs in the first half should reverse into a second-half gain of pounds 10m.

"Clean" profits before exceptionals of pounds 158m this year would put the shares, up 3.5p at 164p, on a forward multiple of 12, assuming a 31 per cent tax. With the consumer recovery picking up next year, 1997 should be better for Coats - but given the unappealing background, the real attraction is the 6.7 per cent yield.

New enthusiasm for Kingfisher

It was only 18 months ago that most of the City was writing Kingfisher off as a basket case, a collection of second-line high street brands with serious question marks over its management capabilities. Since then, the shares have appreciated by about 60 per cent and yesterday analysts were upgrading their forecasts for the next two years.

Their renewed enthusiasm for the group, whose interests include B&Q, Woolworths, Superdrug and Comet, was underpinned by a sparkling set of profits for the six months to August that showed good growth in all its chains, even the Darty electricals shops in France.

After a 10 per cent rise in sales to pounds 2.5bn, profits before tax jumped 47 per cent to pounds 109.6m, above almost everyone's expectations, earnings per share of 11.7p were 43 per cent higher, and shareholders were rewarded with an 11 per cent dividend hike from 4.5p to 5p.

B&Q, which overtook Darty in the period to be the biggest profits contributor with pounds 47m (pounds 31.8m), enjoyed a resurgence of interest in DIY from much more buoyant consumers. Good like-for-like growth was boosted by refits of the smaller supercentre stores and a focus on product availability.

Attention to merchandise also helped Woolworths, which never makes much of a profit in the relatively unimportant first half but still managed an impressive turnaround from last year's pounds 900,000 loss to a pounds 4.6m profit. Comet has started to claw back some of the ground it has lost to Dixons in recent years and Superdrug's repositioning as a health and beauty shop rather than a discount toiletries outlet seems finally to be paying off.

The important question is how much of this good news is in the price, which at 671.5p, up 6.5p, stands handsomely above their 400p low at the beginning of 1995. With forecasts for about pounds 365m in the year to next January and pounds 415m next year, they stand on a prospective p/e ratio of 17, falling to 15.

That represents a small discount to the sector, which seems a little harsh given better-than-average growth prospects, rising consumer spending and a good toe-hold in Europe, the battleground which, in the longer term, will sort out retailing's winners and losers. Fair value.

ABP seeks port

in a storm

Sir Keith Stuart, chairman of Associated British Ports, yesterday gave plenty of reasons why Labour should not extend its proposed windfall tax on privatised utilities to the operator of 22 UK ports, including Southampton, Hull and Cardiff. Goldman Sachs recently included ABP in a list of potential victims of the proposed tax.

Sir Keith, formerly a non-executive chairman of Seeboard, was adamant that ABP was neither a utility nor a monopoly. He claimed, rightly, that the company faced competition at home and abroad, where many ports were subsidised, and had to invest heavily to remain competitive.

The other reason the tax would be inappropriate was not dwelt on at any great length by Sir Keith - the interim results provided no evidence ABP was making the "excessive profits" Labour might be keen to plunder. The adverse share price reaction to news of a lower-than-expected 8 per cent rise in interim pre-tax profits to pounds 46.9m, suggested many in the City think ABP is not making nearly enough.

While investors who bought into ABP at privatisation in the Eighties have hit the jackpot, the shares have hovered around the 300p mark for almost three years.

Today cash-generative, ABP is concentrating on the less ambitious strategy of growing existing port operations rather than chasing acquisitions. Some pounds 65m is being spent on developing Southampton alone and Sir Keith is confident that the fundamental attractions of the port will remain unchanged even if this week's merger between P&O's and Nedlloyd's container activities sees some existing contracts with ABP re-negotiated.

Broker SGST has left its full-year pre-tax forecast unchanged at pounds 100m with the dividend seen rising a penny to 7.5p. On a forward p/e of 15, the shares, down 10p to 295p, yield only 3.2 per cent. Unexciting.

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