RJH writes...

At mega-investment Coats (30% of GPG's non-cash assets), there has been no decent top-line growth; and an expensive drawn-out reorganisation continues. The opportunity cost of holding GPG shares in 2005 versus a simple FTSE100 index tracker has been 3 percentage points. And, based on Coats' Chairman Dr Weiss' own outlook for his baby there is little reason to expect its parent to outperform until the end of next year. Maybe.

Released this morning, Guinness Peat Group plc's (GPG) results give pause for thought...and doubt.

GPG's acquisition of Coats (background here and here and here) has been its main point of interest. Yet Coats' result is not as rosy as the prose to the latest interims suggests.

Perhaps this scribe's expectations for Coats sales growth post-Multi Fibre Agreement (MFA) were unrealistic. Yet it is still a shock that turnover (like-for-like) is only up 2% - a deterioration from the itself ordinary 3% rise reported for the first 3 months of 2005 and less, even, than the '04 interim increase.

Further, it astonishes that Chairman Weiss ventures nothing about the impact of the abolition of the MFA, the new quasi-quotas on China or the shift of textile producers' output to India. There is not, in fact, a single sentence that helps shareholders understand the dynamics of the new MFA-free world and its impact on the company.

In the full year 2004 accounts for Coats, Dr Weiss said (scribe's highlight in red):

Prospects: 2005 will be another year of reorganisation and consolidation, the full benefits of which are expected to be reflected in 2006 and beyond. Investment in new plant and reorganisation spend in 2005 is expected to remain at a similar level to 2004. As in 2004, disposal of surplus assets should largely compensate in terms of cash flow. This spend should start to reduce from 2006. Given the nature of the textiles and clothing industry, there will inevitably be an ongoing requirement for further adjustments in capacity at specific locations but the associated cost of transfer is expected to be significantly lower than in recent years.
Today Dr Weiss says:
Outlook: The trading outlook is not without its challenges. Where possible, it is intended that the remaining restructuring of capacity will be accelerated, principally in Europe. Restructuring cost is therefore expected to continue at relatively high levels until end 2006. However disposal of surplus property will continue to provide a significant offset.
To this shareholder that indicates an admission that Coats was in more of an organisational mess than GPG anticipated; that the expected return on investment has slipped out in time; and that the board has not yet found the recipe for meaningful sales growth - or that the post-MFA environment is simply not conducive to this.

A final point. It is noticeable that Coats has increased debtors and decreased creditors at the same time. As your correspondent's writing partner commented, for a company (GPG) that prides itself on cash management that is a concern. Managing a multinational in a raft of new economies, each with their own regulations, must not be as easy as perhaps they thought.

NB: The writer held GPG shares at the time of writing

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