Sausage skin maker Devro (DVO) dips 2.3% to 181.25p after reporting a drop in underlying pre-tax profit for 2016.
The numbers are in line with downgraded estimates and the dividend is held at 8.8p. Sadly Devro tests investors’ patience with the news further costs are required to drive the turnaround of the business.
Devro’s core business is the supply of edible collagen casings for sausages, salamis and hams. The business is geared into burgeoning global demand for collagen casings linked to higher protein consumption in emerging markets.
Yet the company has had a tough few years caused by geopolitical factors, changing eating habits and retailers putting the squeeze on meat suppliers.
The outlook for the collagen casing market, which grew 4% in a testing 2016, is positive. Devro needs to demonstrate it can regain market share in order for investor sentiment to improve.
STERLING EFFORT
The good news is that while volumes declined by 6.6% in 2016, reflecting reduced demand in Latin America, Russia, China and Continental Europe, Devro’s underlying operating profit increased due to lower input prices and the weakening of sterling against key trading currencies.
Encouragingly, China returned to growth in the final quarter, while chief executive Peter Page highlights increased volumes and stable or increasing local currency sales prices in Japan, South East Asia and the UK & Ireland.
MAKING A COMEBACK
‘We have taken actions to ensure a return to growth in 2017 and beyond,’ says Page.
The company has made large capital investments in recent years and the results are now operational, being new facilities in China and the US.
‘We are now focused on using our high-technology assets to supply a growing global market. Overall demand remains strong and we continue to see many attractive opportunities to grow the business.’
The CEO adds: ‘In 2017, we will focus on increasing revenue to regain market share, achieving cost savings across our global operations and commencing the launch of new, differentiated products, as part of the Devro 100 programme.’
Devro 100 focuses on growing revenue by upgrading its sales capabilities and driving manufacturing efficiencies to reduce unit costs as well as introducing the next generation of differentiated products.
However, Devro’s profit and loss account will now bear the scars of a further £10-12m of exceptional items through 2017 and 2018, on top of £20.7m last year.
The programme will also entail £7-8m of additional capital expenditure, although Devro says there are ‘expected benefits of between £13-16m per annum by 2019.
‘Over this period there will also be a focus on reducing net debt levels. Combined with our upgraded global manufacturing asset base, we are confident this will deliver long term growth.’
SCEPTICISM PERSISTS
Shore Capital analysts Clive Black and Darren Shirley argue de-rated Devro is struggling to overcome the market’s scepticism.
‘We like food ingredients manufacturers as they are one step removed from some of the vagaries of the supermarket scene plus the relatively high barriers to entry and attractive historic return on investment of the space.
‘If Devro’s full potential can be delivered, the group’s recent disappointing track record, plus high leverage and extensive ongoing change embodied in ongoing exceptional items, means that we need to see tangible evidence of delivery before becoming more positive on the stock.’
‘Put another way, we have been tempted to be more positive on Devro stock several times over recent years, reflecting the prevailing company and sector traits.
‘However, our caution has served us well as sustained disappointment has frustratingly been the prime investment emotion.
‘As such we remain cautious on the stock following today’s results and the initiation of the Devro 100 programme as we need to see more proof of delivery and, as such, reiterate our “hold” recommendation on the stock.’
