Slim margins at Coats: The Investment Column

Neville Bain, the departing chief executive of Coats Viyella, could be forgiven for saying enough is enough. The first half of his six- and-a-half year tenure at the UK's biggest textile group saw a near- tripling of the share price as he sorted out the sprawling empire put together by Sir David Alliance, who remains chairman. But reality caught up with the group at the beginning of 1994 and the shares have since underperformed the rest of the market by nearly 60 per cent.

Yesterday's figures for the 12 months to December were as dismal as ever. Headline pre-tax profits knocked from pounds 163m to pounds 94.4m were hammered by the wide-ranging plans announced a year ago to accelerate the transfer of production overseas. The figures were well telegraphed, but even stripping out reorganisation charges up from pounds 10.3m to pounds 54.9m, the underlying 7 per cent fall in operating profits to pounds 174m was disappointing. The decision to hold the final 5.1p dividend, leaving an uncovered 8.8p for the year, and hopes for new chief executive Michael Ost helped propel the shares up 6p to 136.5p yesterday, but the former McKechnie chief executive has a steep hill to climb.

Brazil and Turkey, which proved problem children in the early 1990s, have returned to their bad old ways. They accounted for pounds 8m of the pounds 10.5m decline in profits to pounds 90.3m in the main thread division. Elsewhere, the Dynacast precision engineering operation saw profits dip for the first time for more than five years, falling from pounds 40.1m to pounds 37.6m.

But the real disappointment came on the clothing side. Provisions in the Russian operations of the Berghaus brand made up all the fall from pounds 21.8m to pounds 19.1m in divisional profits. More worrying though was the modest improvement in profits from UK contract clothing, which accounts for most of Coats' pounds 315m sales to Marks & Spencer, where margins are thought to be under 2 per cent.

Profits of pounds 150m this year would put the shares on a forward multiple of 10. Even so, only the 8.1 per cent yield provides much support.