FDBusiness.com

Sausage casings manufacturer Devro has released a first half year trading update, which reports slower than expected revenue growth, with volumes up just 1%.

The slower growth, together with higher costs over the period and other production issues it experienced in the US in the first quarter (Q1), led the group to forecast a £3M decline in half-year profits. However, it expected a stronger contribution in the second half of the financial year, assisted by price increases and stronger volume growth.

City analyst Investec today (June 24) reduced its forecasts for Devro’s financial year 2013 and 2014 performance by about 4% in response to this news and dropped its target share price to 358p. However, Investec analyst Nicola Mallard said that as Devro’s forecast total return was still over 20%, her recommendation was that the company’s shares “remained comfortably in ‘buy territory”.

Devro employs 2,200 people across four continents, making its casings from five manufacturing sites based in Scotland, Australia, the Czech Republic and the US. It uses collagen from animals to make skins for manufacturers of sausages, salamis, hams and other cooked meats.

Weaker demand in Europe

Over the half-year reporting period, Devro experienced weaker demand in Europe – particularly during April and May – some of which Mallard believed was because of destocking following recent price increases. Sales volumes in Australasia and UK businesses were lower than in the previous year, said the company, in both cases reflecting a slight decline in the general market and particularly challenging trading conditions for customers.

Price rises contributed a further 2% to revenue and these were implemented to recover rising collagen costs, said Mallard. Collagen costs now appeared to be steadying. Mallard went on to say that as a result of this slower revenue advance, coupled with the higher costs and Q1 production problems in the US (now much improved), the group expected first-half profits to be about £3M below the previous year. Profit before tax for the first half of last year was £20.2M.

Better second half

Devro’s Trading has picked up in June and the group anticipates a better second half-year performance as capacity constraints ease – in part because additional volumes from its Czech plant are expected to come on stream a month earlier than expected – and destocking eases.

However, even with improved profitability in the second half of the year, Mallard said Investec’s current forecasts “looks testing” and it has therefore reduced its full year forecasts by £2M each in 2013 and 2014.

Its new profit before tax predictions are £43.1M and earnings per share of 20.9p for 2013 (previously 21.9p) and £47.6M with earnings per share of 23.1p (24.0p) for 2014.

Devro reported there had been some success in product testing on its new development line in the US, enabling management to progress plans for its investment in the coming years.

The firm will release interim results on July 31 2013.