Devro (DVO) 187.75p

Gain to date: 13.4% 

Original entry point: Buy at 165.5p, 22 December 2016

A 13.4% gain for sausage skin maker Devro (DVO) is decent enough, although the company’s turnaround is proving a protracted affair. The edible collagen casings maker’s full year results (6 Mar) revealed in-line underlying pre-tax profit of £31.2m and a maintained dividend of 8.8p. Shore Capital forecasts modest pre-tax profit improvement to £32.6m for 2017.

There was also news of a programme to drive revenue and profit growth, called Devro 100. This will come at the cost of a further £10m to £12m of exceptional items through 2017 and 2018 and entail £7m to £8m of additional capital expenditure. We still like the fundamentals of the collagen casing market, which grew 4% in a tough 2016, but Devro needs to demonstrate it can regain market share to turn investor sentiment round.

Although Devro’s volumes declined by 6.6% in 2016, reflecting reduced demand in Latin America, Russia, China and Continental Europe, China returned to growth in the final quarter. Encouragingly, CEO Peter Page also highlighted increased volumes and stable or increasing sales prices in Japan, South East Asia and the UK & Ireland.

We’re sticking with Devro for its long-term growth potential, although the additional costs of the turnaround are a short-term setback. (JC)

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