Devro’s growth prospects look positive, say analysts

Collagen producer Devro is likely to show strong growth going forwards, and there are solid reasons to be positive, according to City analysts. Investec Securities said even though this year is likely to be less buoyant than hoped, due to economic headwinds, the resilient revenues and strong top-line growth bode well for the medium term.

Nicola Mallard of Investec said profits showed solid improvement, at 5.6%, and earnings per share (EPS) were also better, following a reduced tax charge. “The volume-led growth story is still very much present in Devro. This year the group is likely to take a short break from margin expansion, but we expect progress in the coming years as the investment drives productivity improvements.”

Investec said the broad range of global factors continued to support increased demand for products and that top line growth was likely to continue into the next financial year and “probably” beyond.

It said that the earnings before interest and taxes (EBIT) margins should move ahead, as the efficiency benefits from the investment in additional capacity feeds through, while noting that, for the first time, the group highlighted the marked difference in regional margins. The Americas and Asia-Pacific showed a 10% EBIT margin, while Europe was just over 30%, which Investec said was due to the different costs of production, economies of scale in larger sites and selling prices in different regions. The analysts thought that future investment would further enhance margins by adding capacity in the most profitable regions – expected to be 8% during the 2013 financial year.

“Digging below the headlines on revenue reveals a stronger-than-reported performance for edible collagen, which is at the core of the group’s range. The edible collagen growth reported was 9.1% in volume terms and over 11% in revenue,” it said.

Investec also highlighted that the company’s strong results in the Americas were driven by growth in Latin America and Mexico, with revenues there up by 55%, and volumes rising by around 49%. Growth was also seen in south-east Asia, up 11% by volume or 9% by revenue, with growth in the small Chinese operation and good progress in Japan for the Select brand. Investec said this was also gaining ground in German markets. Eastern Europe and Russian markets also had some growth, although this was all but wiped out by currency woes.

It said: “So far, the economic challenges across Europe have had no apparent impact on the group, although they will be added to, for pork processors at least, by anticipated rising pig prices in the latter half of this year. However, the group’s first-half volume growth of 6.5% was achieved despite UK collagen casing sales moving backwards as two product lines moved from collagen to gut/other casings – two specific events rather than any indication of a long-term trend.

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