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China and Russia dent Devro

The sausage casing maker says its Chinese plant won't be earnings accretive until 2018 and exceptional costs will rise in the meantime
August 4, 2016

The bite's proving a bit tougher than expected for sausage casing maker Devro (DVO) as various regional issues and its ongoing transition to new plants added a bit of gristle to half-year numbers. Group volumes dropped 7 per cent, although favourable exchange rates helped Devro secure a flat turnover performance overall. Oversupply issues in China and the group's ongoing pivot towards premium customers dented sales by 52 per cent there, while another large part of the volume squeeze was caused by the economic environment in Russia, where currency devaluations have put upward pricing pressure on imports.

IC TIP: Buy at 265p

Two new production plants in the US and China have come on line. But due to the complexity of the site moves, management said a complete transition would now take longer than originally planned. Exceptional costs will now total £20m for 2016, instead of the £14m originally thought, and the Chinese plant won't contribute anything to the bottom line until 2018. On the bright side, the more mature markets of Europe and North America held up well, with sales up 8 per cent across both regions.

Analysts at Peel Hunt expect pre-tax profit of £36m for the year to December 2016, leading to EPS of 16.6p compared with £31.3m and 16.4p in 2015.

DEVRO (DVO)
ORD PRICE:265pMARKET VALUE:£442m
TOUCH:263-267p12-MONTH HIGH:324pLOW: 240p
DIVIDEND YIELD:3.3%PE RATIO:72
NET ASSET VALUE:70pNET DEBT:125%

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151139.64.42.7
20161130.3-0.72.7
% change--97--

Ex-div: 25 Aug

Payment: 7 Oct