UK Edition
This column has yet to reel in any positive returns from Coats following our first look in August 2017 but a trading statement earlier this month offers enough positive signs to suggest that our patience could yet pay off.
The firm is a leading supplier of industrial sewing thread, zips and fasteners, products that go into everything from trousers to jackets and dresses to footwear, but also tea bags and seat belts. Coats provides items without which its customers cannot operate. As a result the company generated double-digit operating margins, a high-teens percentage return on capital employed and cash even in the pandemic-hit year of 2020.
The good news is that first-half sales this year are expected to exceed those made in the same period in 2019 by some 4pc. Operating profit is expected to be slightly lower than two years ago, owing to the lingering effects of lockdowns in India and increased cost pressures.
The indispensable nature of Coats’ products and its powerful market share make it able to increase prices to at least partly offset any margin hit. That in turn is helping cash flow to further eat into its already modest debts.
Granted, Coats’ balance sheet is not quite pristine, owing to its pension liabilities, but those robust operating margins mean that interest cover is good, so Rajiv Sharma, the chief executive, and his team can continue to invest in the core proposition without having to look over their shoulder.
An ongoing economic recovery should only help margins and profits to continue to rise – although by the same token any investor who fears a double dip may feel there will be opportunities to acquire Coats’ stock at lower levels.
Although the yield is not huge, a multiple of barely 14 times the peak adjusted earnings per share figure of $0.07 reached in 2018 and 2019 seems decent value for the business. Investors can now await further details from the interims next week.
Questor says: hold
Ticker: COA
Share price at close: 69.9p
Update: Clinigen
No more bad news is good news as far as Clinigen’s latest trading update, released on July 13, is concerned. The big danger with our contrarian analysis of last month is that profit warnings tend to come in bunches so the absence of a quick follow-up to June’s negative trading alert is encouraging.
Investors still need to be brave, however, as the pace of recovery at the speciality pharmaceuticals and services company still depends, at least to some degree, on the pandemic.
Most reassuringly, net debt lies well within Clinigen’s banking covenants and once Covid-19 has been contained the number of surgical operations and trials should return to previous levels, to the benefit of Clinigen’s range of treatments, notably the Proleukin kidney cancer drug acquired in 2019.
Another Aim-quoted healthcare play, Medica, a teleradiology and imaging services specialist, is already noting an increase in elective procedures in Britain. That sounds like a more promising backdrop for Clinigen too, even if Medica does acknowledge that clinical trials activity is still slower than usual in America as the pandemic deters volunteers.
Risk-tolerant investors can keep buying Clinigen.
Questor says: buy
Ticker: CLIN
Share price at close: 615p
Update: Restore
Another week and another possible bid comes in for one of this column’s selections, this time Restore, the data and document management systems company.
What is particularly interesting is that the approach comes from Marlowe, whose chief executive, Alex Dacre, and non-executive director Charles Skinner were both senior bosses at Restore. If anyone understands the business and its potential value it should be them, although the putative offer of around 530p a share features just 71p of cash, with the rest in Marlowe shares.
Restore’s shares trade below that, to suggest that the market feels the possible offer will need to be improved, with perhaps a greater cash weighting, but at least the approach backs up our positive view of Restore’s recovery potential.
Questor says: hold
Ticker: RST
Share price at close: 462.5p
Russ Mould is investment director at AJ Bell, the stockbroker.
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