After cutting 350 people from its global workforce earlier in March, financial analysts are confident of the North Lanarkshire-based firm’s long-term future, but remain anxious over a raft of short-term challenges in the international market.
One of the risks facing Devro is its ability to implement the “delicate and sensitive” manufacturing process at new sites in the US and China, said Shore Capital. This process can be greatly affected by slight changes in climate, humidity and raw materials. When accounting for a relatively inexperienced production team, Shore Capital said it may be challenging for Devro to deliver short-term profit.
The FTSE 250 company is two-thirds of the way through a global manufacturing transformation and 2016-17 will see it open new plants in China and the US. So far it has pumped £110m ($157m) into the two sites - split £50m ($71m) on the US and £60m ($85m) on China. But Shore Capital said there is “uncertainty” over when Devro can meet its £14m ($20m) pre-tax profit target for the new sites.
Financial results, in brief
On 1 March, Devro published its full-year trading results for 2015 and experienced a year of two distinct halves. Sales in the first half of the year grew by 4.9%, but this growth was offset by a 2.5-3% decline in the second part of the year, according to Shore Capital. Devro’s full year trading was down by 0.9% year-on-year and the company says it was hit by weak markets in Russia and a challenging situation in Brazil. Japan and the US, though, continued to deliver encouraging returns with worldwide growth, excluding China, up by 3% when compared to 2014.
Devro CEO, Peter Page, even conceded in a meeting with Shore Capital that the company expected to see some “bumps in the road” moving forwards. However, Shore Capital said its “medium-term confidence” in the company’s ability to realise its profit target remains strong.
Shore Capital expects the £14m ($20m) pre-tax profit to be achieved around 2018, with £8m ($11m) to come from the US plant, and £6m ($8.5m) projected for China.
“We’re not worried about the US being able to deliver the full £8m as this is all about cost-saving – they don’t need to win new business to achieve those savings,” said Shore Capital analyst Darren Shirley.
“In China, China is going to start producing in Q4 this year and will start to build up volumes of production over the next couple of years. My estimate is that by the end of 2018, a fair proportion of the £14m EBIT benefits will be realised.”
Devro claims to be the world’s leading manufacturer of sausage casings and has operational production sites in the UK, the US, the Czech Republic and Australia.