Devro — Update 7 March 2016

Devro — Update 7 March 2016

Devro

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Devro

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8 March 2016

Price

315.25p

Market cap

£526m

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Share details

Code

DVO

Listing

LSE

Shares in issue

166.9m

Business description

Devro is one of the world’s leading manufacturers of casings for use in the food industry. It produces collagen-based casings for various manufacturers of food such as sausages, salami and other meats.

Bull

Upgrade so far delivered on schedule and without cost overruns.

Capacity more in line with demand and significant reduction in fixed costs thanks to new technology.

China continuing to progress and on schedule to roll out saleable product by the end of 2016.

Bear

Rationalisation of footprint disruptive in the short term. Ramping up production in the US and China will present challenges.

Russian business continues to struggle due to political and FX considerations.

Industry overcapacity remains a risk, which could cause margin erosion.

Analysts

Sara Welford

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Devro’s transformation programme is almost complete and by the end of 2016 it will have an upgraded and more efficient production footprint. Once the group is operating at lower cost and with a product portfolio better aligned with market opportunities, there is the potential for material savings and further revenue growth in the medium term. While 2016 is likely to be another year of transition, we would expect PBT to make progress, and we believe the restructuring and reinvestment will start to contribute more materially to the bottom line.

Next phase is near

Beginning in 2014 and set to end in 2016, this period of transition for Devro is nearing completion. The much-needed rationalisation has been disruptive and expensive, but it has so far been delivered on schedule and without cost overruns. The key challenges for 2016 are the closure of the old US plant, and the ramp-up of production at the new US and China plants. If these are successfully delivered, the story should move into the next phase: we should start to see returns improving and the investment paying off. Indeed, Devro expects £8m additional operating profit from the US investment with benefits starting from mid-2016.

Where next?

The 2015 results were in line with expectations: while revenues were broadly flat, the rationalisation was delivered on schedule and within budget, with £5.8m of annualised cost savings coming through, slightly ahead of target. Once the rationalisation is complete, Devro should witness successful volume growth, given there is steady growth in global protein consumption. Its investment in China will add capacity in the world’s largest market, while the US project should deliver long-lasting cost savings, and hence group margins should start to improve. If production ramp up is delivered successfully, there is the potential for material profit growth over the next few years.

Valuation: Transformation not priced in

Trading at a consensus FY16e P/E of 19.8x and dividend yield of 2.9%, Devro continues to be valued at a discount to its global peers, most notably Viscofan. Profitability should improve in the medium term, and the factory rationalisation should provide a solid platform on which to build further growth. A re-rating is obviously conditional on the successful delivery of the transformation.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

230.2

31.3

16.5

8.8

19.1

2.8

12/16e

242.0

34.3

15.9

9.0

19.8

2.9

12/17e

256.2

42.0

19.5

9.5

16.2

3.0

12/18e

268.5

42.5

20.0

10.1

15.8

3.2

Source: Bloomberg, company data. Note: *EPS is adjusted for exceptionals.

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Bowleven — Update 6 March 2016

Bowleven

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