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A Broker's PreView - Coats Group Tidying up Loose Threads

Overview: Coats Group is the last remnants of Sir Ron Brierley’s Guinness Peat Group. Many Kiwi investors should now be checking those bottom drawers as Coats Group is currently preparing to delist from the NZX and will only be tradable on the London Stock Exchange.  

Pros: Coats Group is a UK based thread maker with history dating back to the 1750’s. The company employs 20,000 people in 70 countries across 6 continents. They reported revenue of US$750 million, and operating profit (before exceptional items) of US$64.8 million for the first half of 2015. 

Coats, although UK based traditionally, has a global reach with 70 manufacturing facilities around the world (none of which are in the UK). They can now claim that one in five garments worldwide is held together with Coats thread.

Cons: Apart from the fact they are delisting from the NZX, the main concern for investors in Coats at the moment are their pension liabilities. Provisions for pension liabilities has taken up much of the funds raised from the sell down of Guinness Peat Groups once burgeoning  portfolio of assets.

Pensions did not look like an issue when GPG purchased Coats back in 2004. The UK Official Bank Rate was north of 4 percent at this stage. These higher rates allowed pension funds to meet their pension liabilities (i.e. pay the retirees) without breaking a sweat. However when interest rates were slashed after the global financial crisis, funds began to struggle. The Official Bank Rate has been 0.50% in the UK since 2009, making it increasingly difficult for pension funds to earn enough to cover their set liabilities. It is Coats responsibility to support these schemes.

Coats have 3 pension schemes to worry about. One has been agreed, with Coats paying £5.5 million per annum over ten years to cover the deficit. The two larger schemes are still in limbo with the UK Pension Regulator having issues Warning Notices and Coats Group bringing in the lawyers.

Price performance: Coats Group is up 30 percent this year.

Investment outlook: A stitch in time saves nine, so investors should start thinking about how to tidy up these loose ends. Holding London domiciled shares may be more trouble than they are worth, but those looking to hold could do so by using a custodian.

Grant Davies
Investment Advisor
Phone: 03 353 0795
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*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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