Devro boosts capacity

Shortly after sausage casings specialist Devro (DVO) released a first-quarter trading statement that caused the share price to wobble, the company hosted an analyst visit to its Bellshill factory on the outskirts of Glasgow to show off a new production line. The system works at more than double the speed of the old line with a packing system that is four to five times faster. That means the line can produce 80 per cent more a year and has alone added 5 per cent to group capacity.

That said, Devro has no immediate plans to upgrade the factory's other three lines, but has indicated that overall capacity will have increased by 8 per cent for the full year, largely weighted to the second half. A decision regarding a £50m-£60m investment in the US is likely to be made later this year. That will be helpful as lower profits in the first quarter were partly caused by manufacturing issues in the US, which held back yields, despite good performance in North America.

These issues are now resolved and vital price increases have also been secured. That, along with extra capacity and strong demand, should improve performance for the remainder of the year. Furthermore, a major capital investment in the Czech Republic means additional volume is due to come on stream in the second half.

Panmure Gordon says...

Hold. Following the weak first-quarter update, Devro indicated that the recently secured pricing should contribute to an improved profit performance over the remainder of the year. Most of Devro's major markets continue to exhibit strong growth. We maintain our current-year forecasts, so expect revenues to grow 5 per cent to £252m, driven by demand in developed and emerging markets, a 7 per cent rise in adjusted pre-tax profit to £45m and underlying EPS of 21.8p. The shares are trading on a forward PE ratio of 15 - a 15 per cent discount to rival Viscofan.

Numis Securities says...

Add. The visit to the Bellshill factory provided a chance to see where some of the £131m spent on new capacity from 2007 to 2012 has been invested. The briefing also offered encouragement for the full year. Major drivers are population growth, increased affluence and urbanisation. An additional driver for Devro is that edible collagen offers 15 per cent greater cost savings for sausage makers. The performance for the rest of the year will be helped by favourable exchange rates, the ongoing success of Devro's Select range of products, price rises, weak comparisons and extra capacity. Expect EPS of 22.1p in 2013 and 25.2p in 2014.