Devro – even the chairman is buying more shares at this price

This market-leading collagen casings manufacturer is looking excellent value and ready to re-rate, argues Mark Watson-Mitchell.

Even in times of pandemic, people still have to eat.

So, demand for food is always there, as has been evident of late with the major supermarkets having shelves cleared and working overtime to handle new orders.

And this bug has penetrated a global area.

But then so too has the sales effort of Devro (LON:DVO), which has some 100 of its staff in daily contact with more than 1,000 of its customers, as they provide specialist technical advice and support for sophisticated food manufacturers in more than 100 countries.

So exactly what does the Glasgow-based Devro do?

It is one of the world’s leading suppliers of collagen casings for food.

Those casings are used in the production of a wide variety of sausages and other meat products.

The group employs some 2,000 people in its manufacturing sites in the UK, the USA, the Netherlands, Australia, the Czech Republic and China.

At its plants across the world the company transforms collagen, a naturally occurring polymer, into gel, tubular casing and film.

There are very few significant producers of collagen casing with such a global reach.

Around a third of its sales are into emerging markets, while the balance is into developed markets, where it is often the market leader.

In the first quarter of this current year the company reported that its emerging markets sales were up 13%, led by strong growth in Latin America, Russia and East and South East Asia. Its mature markets were just 3% weaker because of distributor destocking.

Just last Friday the group issued a trading update ahead of its AGM this Thursday.

In response to Covid-19 it has cut all discretionary capital and operating expenditure, while not taking advantage of any government support scheme.

It has a robust balance sheet, strong financial position, liquidity and banking facilities, certainly sufficient to handle the currently uncertain times.

Current-year estimates suggest that the group could see revenues of some £250m, giving £28m pre-tax profits, worth 12p per share.

For the next year sales of £260m might push profits up to £35m, worth 16p per share in earnings.

Going forward into 2022 some broker estimates suggest that £266m of sales could increase profits to £38m, worth 17.5p per share in earnings.

The dividend yield over the next two to three years could average around 6%, when dividends are being paid.

There are 167m shares in issue of which NNIP Advisors, the Dutch-based asset managers, hold a convincing 27m shares, some 16.2% of the equity.

Other institutional holders include Marathon Asset (6.88%), Franklin Templeton (5.33%), Blackmoor Investment Partners (5%), Neptune Investment (5%), Aberdeen Asset (4.30%), Aberforth Partners (3.59%), Chelverton Asset (3.57%), NFU Mutual Investment (3.25%) and AXA Investment (2.86%).

Brokers Shore Capital consider that the group’s shares are on an undemanding valuation currently and are rated by them as a ‘buy’. They consider that the company is well placed to deliver growth over the short and medium term.

Just a year ago the shares were trading at 224p, a month ago they fell to a low of 125p. They recovered to 140p by last week. After last Friday’s ‘robust’ trading update the shares have been up to 157p and are currently 149p.

Readers will know by now that I am always keen to see what the corporate ‘insiders’ are doing in the equity. So, I was pleased to see that a number of its directors were buyers of the shares in early March at around the 167p price level.

Better still was the notice that Steve Good, the group’s Chairman bought 20,000 shares at 147.7p last Friday after the Update announcement.

The interims are due to be announced in July but before that we have this Thursday’s AGM.

I see these shares gradually climbing back up to 180p within the next few months.