A profits warning and worries about higher input costs mean that shares in sausage-skins maker Devro (DVO) are no longer worth buying.
Devro's bosses blame adverse currency movements, continuing raw material cost increases and extended plant commissioning times for the warning. Hide costs – a key ingredient for edible collagen casings – have risen on strong Chinese demand and lower rates of cattle slaughter in South America. Broker Numis Securities thinks full-year input costs could be £4.5m higher than last year, with hide costs likely to rise further in 2013.
Still, sales volumes have continued to grow with strong demand in both Devro's established and emerging markets. But Numis points out that the 9.1 per cent volume rise seen in edible collagen casings during the first half hasn't been sustained into the third quarter. The broker has cut its full-year pre-tax profit estimate by £2.4m and expects £41.8m, giving EPS of 20.2p (2011: 19.8p).
