Industrial threads manufacturer Coats (COA) could be on its way back to the big league as the business, previously one of the 30 largest London-listed companies, secures a deal on historic pension liabilities.
Coats, one of the few survivors of the Financial Times’ original 1935 FT30 stock index, agreed to make an upfront payment of £256m to its pension funds and £14.5m a year until 2028 to settle a long-running stand-off with the UK Pensions Regulator (TPR).
Analysts at Canaccord Genuity previously said Coats could even see a return to the FTSE 250 index once pension funding has been resolved.
Shares trade 13% higher today at 52p.
Pensions have proved a stumbling block to the investment case at Coats since it was re-listed as an independent company from prior owner, asset manager Guinness Peat.
While Coats underlying performance has been strong since its return to the stock market, investors have been put off by its unusual balance sheet structure.
Coats finished the first half of its financial year, at 30 June, with cash of $535m (£431m), debt of $476m and a defined benefit pension obligation of £522m.
It delivered $194m of earnings before tax, interest, tax, depreciation and amortisation (EBITDA), a key measure of a company’s ability to service debt.
Coats' ratio of EBITDA to total debt is 2.5.
SHARE PRICE CATALYST
‘The primary share price catalyst would be a threshold resolution of the pension issues – which while not guaranteed seems the pragmatic conclusion for all relevant parties, in our view,’ wrote Canaccord analyst Caspar Trenchard before today’s news.
‘The ability to adopt a progressive dividend policy, to accelerate its targeted acquisition strategy and most likely qualify for Mid250 index inclusion in the second half of 2017 could all propel the shares.
‘Alongside the resolution/clarity agenda the recent rally in bond yields may provide further positive momentum as the mark-to-market scale of the deficit erodes.’
Coats previously featured in our list of Great Ideas, a weekly item featuring Shares’ top two weekly stock ideas, in July 2015 at 25p.
The largest producer of industrial threads in the world, Coats manufactures enough thread to go to the moon and back every three hours.
Related article: How to understand pension deficits.