Devro reports rising demand, costs and adverse currency factors

By Mike Stones

- Last updated on GMT

Related tags: Raw material costs, Investment, Profit

Sizzling demand but higher costs and currency factors are impacting Devro's financial performance
Sizzling demand but higher costs and currency factors are impacting Devro's financial performance
Sausage skin manufacturer Devro reported strong demand for its collagen sausage castings, which were offset by rising costs and adverse currency factors, according to its latest interim management statement covering the period from July 1 to October 22.

Sales grew in a range of markets – particularly Europe, Japan, and the Americas.

But, while demand “remains strong”,​ both in established and emerging markets, raw material prices have continued to rise and this trend is expected into next year, it said.

Adverse currency movements combined with rising raw material costs and extended plant commissioning periods will place full year operating profits “slightly below our original expectations but ahead of last year”.

Profit before tax

After the statement, city analyst Pamure Gordon reduced its full year 2012 profit before tax forecast by £2M to £41.9M.

Panmure analyst Damian McNeela said: "Despite the strong demand for its products, Devro has experienced rising raw material costs, particurly from rising hide costs, due to a lack of availability in Europe, which the company expects to continue into financial year 2013E.”

Also the firm’s profitability was likely to be further damaged by the strength of sterling versus the euro and the Czech crown.

“We continue to believe in the long-term growth opportunities provided by rising meat consumption in emerging markets and the opportunity to switch manufacturers from natural gut to collagen casings in developed markets,”​ said McNeela.

Operating challenges

“However, given the near term operating challenges and a valuation that looks fair to us at current levels, we maintain our ‘hold’ recommendation and 320p price target.”

Shore Capital predicted that currency factors would hit earnings before interest and tax (EBIT) by £1.5M in financial year 2012.

Its analysts Daren Shirley and Clive Black cut their EBIT forecast by 4% or £2M to £43M and current pre-tax profit to £41.8M.

But Devro was likely to benefit from recent investments soon. “We believe that for 2013, the group will be better positioned to offset any input cost/currency driven margin pressure, as the benefits from the investment in manufacturing build through the year − particularly in the Czech facility,”​ said Shirley and Black.

Shore repeated its ‘Buy’ recommendation.

Peter Page, Devro’s ceo, said: “Our business is well positioned for the future, with good demand from a global customer base, an experienced management team, and a proven product portfolio.”

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