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Analysts at Berenberg raised their target price for Coats Group (LSE:COA), a manufacturer of thread and structural components, from 120.0p to 135.0p on Thursday. The increase followed the announcement that Coats had fully de-risked its UK pension scheme, which has long been seen as a key milestone for the company.
According to Berenberg, Coats has successfully hedged against all financial and demographic risks related to its legacy pension obligations. The de-risking effort is expected to cost between $90.0m and $128.0m, with a payback period of approximately three to four years. This move will make the temporary suspension of annual pension contributions, set to begin in January 2024, a permanent shift.
Berenberg emphasized that this development removes a significant source of uncertainty and volatility for the company. With the pension scheme now fully secured, Coats is in a much stronger financial position. The group is forecasted to have a leverage ratio of 1.6x by the end of the 2024 financial year, along with an improved free cash flow (FCF) outlook.
The de-risking of the pension scheme provides greater stability for Coats and allows the company to focus on its core operations without the overhanging risks associated with pension liabilities. Berenberg highlighted that the group’s underlying trading performance appears solid, and recovery in its end-markets is anticipated to continue.
This combination of a stronger financial position, better free cash flow generation, and steady operational performance led Berenberg to revise its price target. The new target of 135.0p reflects these improvements and would place Coats shares at a reasonable 17 times forecast earnings for 2025 and a free cash flow yield of 5%.
The German bank pointed out that Coats is well-positioned for future growth with the removal of pension-related uncertainties. The strengthened financial outlook, coupled with solid trading, enhances the company’s long-term prospects.
In conclusion, Berenberg’s revised target price reflects confidence in Coats’ ability to capitalize on its stronger financial position, clear operational strategy, and favorable market conditions. The successful de-risking of the pension scheme has laid the foundation for sustained growth and greater financial flexibility in the years ahead.
