Coats in need of major surgery

The Investment Column

Coats Viyella, the troubled textiles group, has fallen apart at the seams over the past few years. Terrible first-half results yesterday saw its shares tumble another 13p to 108p, having fallen from 164p a year ago and 283p in 1994.

In the past five years the shares have underperformed the stock market by more than 70 per cent.

Pre-tax profits fell 12 per cent to pounds 41.5m in the six months to June. The figures reveal a catalogue of woes. The spring collection at Jaeger, the normally reliable fashion label, flopped. A downturn in the Russian fashion market whacked margins on sales of Berghaus clothes and Coats' contract clothing business, which supplies M&S, was disrupted by a continuing restructuring program. To cap it all, the strong pound wiped pounds 6m off operating profits.

There is no easy solution to Coats' many problems. The second half is likely to see some sort of improvement, but not much of one.

Mike Ost, the new chief executive, faces an uphill struggle to pull the group out of the mire. In his short tenure he has already accelerated Coats' belated restructuring programme, which will cost the group up to pounds 30m a year, compared to an original budget of pounds 10m. But the group is in need of more fundamental surgery.

Mr Ost is to announce his future strategy by the end of the year. He will have to reveal a raft of disposals or a break up of the group via a demerger to restore any sort of investor confidence.

House broker BZW has slashed its current year profits forecast from pounds 140m to pounds 92m to reflect the rise in restructuring charges and the poor prospects for the second half. That puts the shares on a prospective p/e ratio of 13. Coats should also maintain its dividend at 8.8p, to give a forward yield of more than 10 per cent. Even so the shares look high enough.