Numis reiterates 'hold' rating for Devro as American division struggles

Analysts at Numis reiterated their ‘hold’ recommendation for shares of Devro on Tuesday, adding that the company’s valuation was 'fair' despite the shares' recent underperformance relative to its benchmark.

Hence, the broker reiterated its 220p target price for Devro, whose shares were then changing hands at a forward price-to-earnings multiple of 13.0, even though the shares had retreated by 13% year-to-date, underperforming the FTSE All Share by 8%, and were trading at a 30% discount to sector peer Viscofan.

The broker also noted how Devro’s divisions saw varying performances in 2017, with sales in the Asia Pacific region up 13%, which increased operating profit there by 3.6% to £28.4m - due to volume growth of 69% in China - while European sales rose 8.3% to £110m, albeit as operating profits in the region fell by 2.2% to £40.7m.

Furthermore, Numis highlighted the company's difficulties in the Americas, where sales fell 3.8% to £61.6m after a 25% drop in volumes reported in Latin America, leading to a fall of 2.9% in operating profits from the £23.7m.

Yes, results for fiscal year 2017 were in line with market expectations, on the back of "good" progress in both volume growth, up 6.5%, and EBITDA, up 9%, they conceded.

However, the broker also noted that the sausage casing manufacturer's operating profit had remained flat and adjusted EPS saw a 6% decrease.

On the other hand, Devro’s DPS was seen increasing 30% to 10.4p in 2018 and by a further 12% to 11.6p in the following year.

"We think Devro needs to demonstrate its ability to deliver operating profit growth following its recent investments in the US and China. Both of which are performing below the original planned profitability. As such we maintain our Hold rating and 220p TP."

As of 1132 GMT, Devro’s shares were down 1.2% at 197.60p.