Devro´s US and China investments facing delays, but 1H profit jumps

Lower production costs and a favourable tailwind from movements in foreign exchange rates helped to offset falling sales volumes, especially in China, at Devro in the first six months of the year.

However, markets reacted poorly to news that its new projects in the US and in Asia´s largest economy would take longer than expected before they began contributing to the company´s bottom-line.

Revenues at the sausage skin manufacturer rose by just 0.2% to reach £112.9m.

Indeed, underlying operating profits jumped 13.3% to reach £18.0m.

“Improved manufacturing efficiencies in Scotland and Australia, lower input costs and exchange rate benefits more than compensated for the effects of reduced year on year sales volumes on underlying operating profits,” the company said in a statement.

However, the company´s profits before tax were almost wiped out as a result of the £13.4m of direct charges and costs associated with the opening of the new plants.

PBT fell 97% to £0.3m while net income dropped from £7.3m to -£1.2m.

The firm, which employed about 2,200 people and operated manufacturing sites in the US, UK, Czech Republic and Australia, explained that it had decided not to chase those clients in China who were “solely” focused on price.

Delays in the US and China

Devro also announced delays to profit contributions from investments in new plants in the US, of about five to six months, and China, of approximately twelve months.

Its operations Stateside were said to have faced “various product complexities” while in China choppy market coinditions meant it would take longer to build-out its premium segment.

Over the latest six-month period Devro had invested £9.5m in the US and another £3.9m in China.

Despite all of the above, the Board reaffirmed its expectations for full-year 2016 operating profits in terms of earnings before interest and taxes (EBIT).

Interim dividends per share were unchanged at 2.7p.

“Whilst our fundamental investment thesis around profit recovery and a stronger emerging market story has not changed, the delay in evidencing a return on the large investments is clearly disappointing, especially given leverage. We will review our 12m TP and recommendation post the analyst meeting but anticipate some pressure on the share price today,” analysts at N+1 Singer said in a research report sent to clients before the start of trading on Wednesday.

As of 14:30 BST shares in the small-cap outfit were down by 7.25% to 259.00p.