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GPG's Coats unit over worst of slump

Monday 15th March 2010

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Guinness Peat Group said its largest investment, the Coats Group thread-making business, is over the worst of its trading slump, though recovery may be hampered by rising raw material costs.

Coats’ two main business units, Industrial and Crafts, will benefit this year from signs of a pick-up in consumer demand in some markets, the company said in a presentation that was released to the NZX. With inventory levels historically low, the Industrial unit will benefit as customers begin restocking during the first half of this year. The Craft unit will also benefit from improvements in market conditions, it said.

Losses at Coats have pushed the parent into the red in the past two years as the global recession slashed sales and earnings. Coats cut debt by 81 million pounds in 2009, benefiting from ‘strong’ cash flow, and GPG chairman Ron Brierley said this month it had “emerged well” from the downturn. Still, rising costs of materials will hamper its performance in 2010, the company said.

“It’s not all plain sailing yet,” said Alan Moore, who helps manage $400 million at Milford Asset Management Limited., including GPG shares.

Raw materials, which make up about one third of Coats’ costs, rose through late 2009 and have continued to advance so far this year, putting further pressure on gross margins, the company said today.

It cited the cost of raw materials as a key risk for new sales growth plans. The average net working capital to sales ratio fell to 20% in 2009 from 23% in 2008.

GPG has mostly completed its restructuring of Coats, meaning the company’s reorganisation costs will fall and earnings recover.

Shares of GPG fell 1.1% to 90 cents on the NZX today and have gained 48% in the past 12 months. The shares are rated a ‘buy,’ based on the consensus of six recommendations compiled by Reuters.

Brierley announced this month that GPG’s top priority is making a “value return” to shareholders. He wasn’t specific about what form that may take. Plans to return value to investors were initially flagged in 2008 but were put on hold as the global financial crisis unfolded.

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