GREAT IDEAS

Pro­duc­tiv­ity gains and China pric­ing progress to boost sausage skins maker

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New: Devro / Sa­van­nah

Up­dates: Gamma Com­mu­ni­ca­tions / Michelmersh

Seek­ing a tasty re-rat­ing and div­i­dend growth story? Then tuck into sausage skin man­u­fac­turer Devro (DVO) at 191.5p, where there’s al­most 40% up­side to­wards In­vestec Se­cu­ri­ties’ 265p price tar­get.

Lately unloved, the Mood­ies­burn-head­quar­tered food pro­ducer is emerg­ing from a chal­leng­ing few years of hefty in­vest­ment, muted top line growth and mar­gin pres­sure.

A bet­ter sec­ond half is in prospect which should sup­port a re­turn to full year profit growth, while Devro also of­fers a 4.7% div­i­dend yield for in­vestors pre­pared to stick with the busi­ness through near-term chal­lenges.

A SMALL CAP SNACK WITH SIZ­ZLE

Devro sup­plies ed­i­ble col­la­gen cas­ings for sausages, salamis and hams and has a demon­stra­ble abil­ity to dif­fer­en­ti­ate prod­ucts in a global col­la­gen cas­ing mar­ket grow­ing at 2-4%.

The com­pany’s sales should at least be able to keep pace with that growth and on a longer term view the £322.2m cap is geared into bur­geon­ing de­mand for col­la­gen cas­ings linked to higher pro­tein con­sump­tion in emerg­ing mar­kets.

Chal­lenges in­clude geopo­lit­i­cal fac­tors, cur­rency head­winds, cost in­fla­tion and re­tail­ers putting the squeeze on meat sup­pli­ers.

Op­er­at­ing mar­gin per­for­mance has been volatile in re­cent years and there’s work to do to close the mar­gin gap to Span­ish peer Vis­co­fan.

COOK­ING UP STRATE­GIC PROGRESS

Half year re­sults (1 Aug) were en­cour­ag­ing, re­veal­ing strong growth in Con­ti­nen­tal Europe, Rus­sia and Latin Amer­ica and im­proved profit mar­gins, thanks to a stronger per­for­mance on man­u­fac­tur­ing yields and sav­ings from the Devro 100 pro­gramme, de­signed to ac­cel­er­ate growth while im­prov­ing man­u­fac­tur­ing ef­fi­cien­cies.

CEO Rut­ger Hel­bing also re­ported pos­i­tive progress with Devro’s strate­gic pri­or­i­ties; the per­for­mance of Devro’s North Amer­i­can plant con­tin­ued to im­prove and the aver­age sell­ing price in China in­creased markedly, Devro hav­ing ceased le­gacy im­ports into China from other group sites while con­cen­trat­ing on serv­ing cus­tomers that value its dif­fer­en­ti­ated prod­ucts. While ed­i­ble col­la­gen cas­ings vol­umes were flat in the half, growth is ex­pected in the sec­ond half driven by the Amer­i­cas and Asia, with the lat­ter ex­pected to ben­e­fit from the full com­mer­cial launch of Devro’s new Fine Ul­tra prod­uct.

Fine Ul­tra cas­ings were in­tro­duced to key cus­tomers in the sec­ond half of 2017 and com­mer­cial launch in Asia and Europe is planned for the sec­ond half now un­der­way.

Given the op­er­a­tional gear­ing in the busi­ness, vol­ume growth should drive sig­nif­i­cantly im­proved profits and Devro has also iden­ti­fied ad­di­tional sav­ings to help re­build mar­gins.

For cal­en­dar year 2018, In­vestec fore­casts growth in nor­malised pre-tax profits to £34m (2017: £29.5m), ahead of £39m and £42.4m in 2019 and 2020 re­spec­tively.

Based on fore­cast 2018 earn­ings of 15.4p and a div­i­dend hike from 8.8p to 9p, Devro ap­pears in­ex­pen­sive on a prospec­tive price to earn­ings ra­tio of 12.4 times.

Should share price weak­ness per­sist, the com­pany could even draw a bid, with Vis­co­fan one name po­ten­tially in the frame. (JC)

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