Results find Devro in ‘sizzling form’, says City
The Scottish firm based in Glasgow has published interim results ahead of expectations, with turnover for the half year at £107.1m, up 2.4% on the same period last year, and profits before tax up 11.6% to £19.5m.
Increased profitability this year was driven by a shift in sales mix towards higher-margin countries in Eastern Europe and Southeast Asia, although the firm also benefited from a lower tax rate.
Analysts Graham Jones and Damian McNeela of Panmure Gordon said that a“leading market position” in collagen casings, where the firm has a 37% global market share, meant that the medium-term outlook remained positive for Devro.
World population growth, higher incomes and urbanization were all expected to drive increased meat consumption, which would help the business, said Jones and McNeela.
Higher-value sales
The analysts noted that Devro’s 19.8% increase in operating profits in the first half of 2011 reflected a “shift towards higher-value sales in emerging markets such as Eastern Europe, Southeast Asia and Russia”.
“This gives us confidence that Devro will be able to grow profitably in emerging markets over the long term,” they said.
New collagen product Select was launched in May 2010 to accelerate the conversion of food manufacturers from natural gut to collagen casings.
The product is designed to overcome bite and appearance problems associated with typical collagen products in traditional sausage markets such as Europe and Japan, where Devro said it is already selling well.
Although management insisted during an analyst call that Select remains in the early stages of development, Jones and McNeela said: “[We] are encouraged by its progress to date and believe it has the potential to accelerate the conversion of manufacturers to collagen.”
Devro spent £15m in the first half of 2011 to improve factory capacity and efficiency, and plans to invest a further £30m in the second half of the year.
Core collagen business
The sale of German distribution business Devro GmbH for €1.9m (£1.65m) to Visko-Teepak, to focus on what Devro calls its "core collagen business", made “good strategic sense”, according to Panmure’s analysts.
"It simplifies the business, reduces exposure to lower-margin and less-stable sales and should allow the newly established team an opportunity to increase sales from Germany,” said Jones and McNeela.
Devro chairman Steve Hannam said: “The continuing business remains on track to deliver the board’s expectations for the full year. Our investment plan is expected to lead to further improvements in operational efficiency, and will provide extra capacity for the anticipated growth ... as gut conversion opportunities and overall levels of meat consumption increase.”
