Jefferies starts Coats at 'buy' thanks to focus on sustainability

As well, they judged that the thread manufacturer's above-trend revenue growth and the potential for a recovery in margins meant its approximately 40% discount to the sector was too "severe".

Key to their investment thesis, Coats, which supplies the fashion industry, had an early-mover advantage, having already spent years working on corporate sustainability.

A case in point, its margins in Apparel and Footwear had already recovered to above pre-Covid levels, because customers were willing to pay a premium for Coats's products based on recycled or bio-degradable materials.

There were also positive drivers in place in its other divisions, which all told Jefferies said would see Coats clock in with organic revenue growth of 3.8% between 2022-24, up from the 2.2% pace seen between 2014-19.

In parallel, Coats's Performance Materials division was expected to exit 2022 with margins of approximately 10.5%.

Despite all of the above, the forward price-to-earnings multiple for Coats's shares was at a 50% discount to the sector, the analysts highlighted.

Looking at the enterprise value-to-earnings before interest, taxes and amortisation multiple, that was at 39% discount.

Hence, Jefferies set a 97.0p target price for the shares, which would see them trade on an EV/EBITA multiple of 12.4 times or a 22% discount relative to the sector "which is more in line with pre-Covid levels".