Shares in industrial thread business Coats (COA) were beaten up after issuing full year results on 1 March in what we can only describe as a complete over-reaction by the market. Use this opportunity to buy more shares at 86.3p.

The underlying business is thriving with adjusted operating profit up 21% in 2018 to $195m. Operating margins increased from 11.8% to 13.8% and the dividend was raised by 15% to 1.66c.

The market focused on $48m of one-off costs, around half of which was linked to a project that will increase productivity in the business. A target to deliver $15m of net savings by 2020 has been achieved two years ahead of plan.

The rest of the exceptional items were linked to pension payments and legal costs relating to a historic environmental matter.

Chief executive Rajiv Sharma says the recent sale of the North American crafts operation has made a Coats a simpler entity to understand – it is now a pure business-to-business global manufacturer.

It recently bought software solutions group Threadsol to help customers reduce fabric waste and establish accurate product costing.

It has also taken a 9.5% stake in technology firm Twine which has developed a new way of printing and enables thread to be produced to any colour  or length.

‘We would have bought a lot more than 9.5% had we been able to,’ says Sharma. ‘If Twine’s product is industrialised and operated at scale it has the potential to disrupt the market. Coats is the recommended thread supplier on the product and we have a seat on Twine’s board.’

Coats’ Performance Materials division continues to be the fastest growing part of the group with 23% revenue increase in 2018 to $332m on a constant currency basis. That was split into 7% organic growth and 16% from the 2017 acquisition of Patrick Yarn Mill which specialises in cut-resistant and flame retardant yarns.

The division continues to see challenges in North American consumer durables which is principally down to the bedding sector. ‘There is a trend of going from a normal mattress to bedding in a box which uses 30% less thread,’ says Sharma.

The automotive industry has been flat year-on-year and Coats expect this trend to continue. Its products are used in car seats, airbags, seat belts, interiors and in the manufacture of tyres.

The strongest opportunities for Performance Materials are seen in telecoms (coated fibreglass to strengthen fibre optic cables) and protective clothing.

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