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TEMPUS

Work from home brings material gains

The Times

While the bootmaker Dr Martens was reporting lower profits last week to little fanfare one of its leading suppliers, Coats, posted an upbeat bulletin predicting a full-year result in line with analysts’ expectations.

Coats mainly puts thread in a fifth of the world’s garments and materials for Dr Martens, Nike and Adidas shoes and trainers. It also makes what it calls performance materials for protective clothing and car engine hoses, car seats, tampons and tea bags.

Many of its end products make it vulnerable to fluctuations in consumer spending but since Covid the company has gained from the trend while working from home for more casual wear or, as Coats calls it, athleisure.

Rajiv Sharma, the chief executive, said: “We focus on the most successful brands to win with the winners and within the mass market and fast fashion we use discretion to win where it matters.” By picking the brands it deems worth spending time and money on, it generates operating margins in the mid-teens.

Sharma acknowledged the current macroeconomic uncertainty but he declared that Coats had “a well-defined and tested playbook that focuses on cost and cash actions”.

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Organic sales from July to October grew by 6 per cent, a slowdown from 19 per cent in the first six months. The firm accounts in US dollars because of its international spread, which puts it at the mercy of foreign exchange fluctuations. That was expected to clip 5 per cent off profits this year but if the post-Truss recovery in the pound is maintained it may render that prediction a little too pessimistic.

The main driver in the past four months was performance materials, thanks to the expansion of the 5G mobile infrastructure and new automotive business such as seats for a Mercedes electric car. Performance sales were up 15 per cent, continuing the first-half trend. As global car production is still below 2019 levels, there is plenty of room for further recovery in this segment.

Apparel and footwear sales were up only 3 per cent on this time last year, mainly because of retailers destocking, a factor that the group thinks may continue to play out until next summer. The firm has tried to minimise that by cutting prices while maintaining margins, putting some of the pain on its own suppliers.

Coats has begun strategic projects designed to deliver incremental adjusted operating profit of $50 million by 2024. These include boosting margins by improving the customer portfolio, mitigating structural labour problems in the US and minimising costs.

Coats has set up a factory in Mexico and bought two businesses, Texon and Rhenoflex, to bolster its footwear operations with insoles and eyelets. They have taken the group into fashionable recycled and bio-based materials such as cellulose and vegan “leather”.

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The investment bank Peel Hunt predicts a small decline in like-for-like full-year pretax profits but a rise from $231 million to $275 million after taking into account $27 million from Texon and Rhenoflex and $6 million from associated efficiencies and economies. That would produce 8p earnings per share, rising to 11.2p in two years, translating to a p/e ratio of 10.2 this year that should fall to 7.3 for 2024.

The dividend is expected to progress from last year’s 2.1p to 3p by then, to give a 3.7 per cent yield on the share price of about 67p.

Tempus last looked at Coats in 2019, when the expected p/e ratio was 10.3 and yield 2.7 per cent at 76p. We advised avoiding the shares, which were then knocked back to 34p by the initial Covid shock and had to start rebuilding. The firm’s US military contracts gave the shares a 21p fillip on the Russian invasion of Ukraine, so they have defensive qualities in more ways than one.

ADVICE Hold
WHY A well-managed business, but hold off buying until the uncertainties clear

Personal Assets Trust

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Personal Assets Trust (PAT) aims to do what most individual investors find hardest: go against the herd. It will stop at nothing to meet its pledge “to protect and increase (in that order) the value of shareholders’ funds per share over the long term”.

While its bread and butter are bonds and shares, it also holds cash and cash equivalents, including gold and derivatives, and from time to time it hedges currencies. There are no predetermined exposures to asset classes, currencies or geography.

That means that investors in the trust must place total faith in the fund managers. A measure of that faith is that the shares, at 480p, stand at a premium to its 473p net asset value. The share price has been marking time for the past year, but at or around its record high.

The trust was set up in 1983 by the late Ian Rushbrook and Robin Angus, two of Edinburgh’s more idiosyncratic professional investors. The board replaced them with Troy Asset Management, founded by the legendary General Electrical Company industrialist Lord Weinstock. This added another layer of management fees but Troy and its manager, Sebastian Lyon, Weinstock’s partner, share PAT’s devotion to patient, long-term asset growth.

For the half year to October 31, net asset value per share fell 3.6 per cent including reinvested dividends, while the FTSE All-Share Index fell 5.8 per cent. Without dividends, the returns were respectively minus 4.4 per cent and minus 7.4 per cent.

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PAT pays quarterly dividends, 1.4p this year, for a yield of 1.2 per cent.

Lyon took advantage of the summer rally to trim equity holdings. Consequently it has 57.7 per cent of its money in US and UK government bonds and 8.9 per cent in gold.

“Stock market falls have been driven by the decline in valuations and not yet the fall in profits from an economic downturn,” Lyon said. “Those are still to come in 2023.”

Faced with that grim outlook, for those not needing high income the trust’s defensive qualities make it a high-quality haven.

ADVICE Buy
WHY Proven management is committed to protecting value

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