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Productivity gains and China pricing progress to boost sausage skins maker
Thursday 06 Sep 2018 Author: James Crux

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.


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.


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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