Devro Plc

Devro Plc (LON: DVO) is a FTSE All-Share listed food producers Company, which is a supplier of collagen casings for the food industry. It conducts its operations through three segments: the Americas, Asia-Pacific and Europe.

On 2 March 2021, the Company will release the full-year results.

Rationale for Valuation – Speculative Buy at GBX 148.60

• Devro expects net debt to improve by 2020 year-end and anticipates a strong cash generation in 2021.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiple are currently lower than the Food & Tobacco industry.
• The liquidity position stays strong, with the confidence to increase the investment for the future.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above 9% and 14%, respectively, in the last period.
• From the technical standpoint, 90-day RSI stood at around 45, which is supporting the upside movement.

Key Risks

• The Company operates in highly competitive markets, which could adversely affect the Group’s results.
• In the COVID-19 situation, the Company increased reliance on online platforms, which needs to be maintained properly to avoid cyber-attacks or frauds, failing to do so will deteriorate the reputation of the Company.
• Changes in environment-related laws and regulations could affect the overall business of the Company.

Trading Update (for the period 1 July to 31 October 2020, as on 24 November 2020)

• During the period, the trading remained robust, with Group operating margins improving and collagen volumes growing.
• On 13 November 2020, the net debt stood at £123.8 million, with normal seasonal cash generation.
• In July 2020, the Board has announced an interim dividend per share of 2.7 pence, which will be paid on 15 January 2021.
• Moreover, the emerging markets continued to grow well in the period 1 July to 31 October 2020.
• While there was a decline in Continental Europe and UK & Ireland regions, due to a weaker food service channel.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

At the year-end 2020, DVO expects net debt to be improved, with the covenant net debt to underlying EBITDA ratio of less than 2x. For FY20, the Company expects good growth in emerging markets. While in the mature markets, it expects broadly flat collagen volumes. It also expects a strong cash generation in 2021. Despite the market conditions to remain challenging for the rest of the year 2020, Devro remains on track to deliver against the expectations. Meanwhile, in the period 1 July to 31 October 2020, the Company has made good underlying progress. Overall, it is a good opportunity to invest for the long term. The stock made a 52-week low and high of GBX 116.46 and GBX 195.40, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Devro at the current market price of GBX 148.60 (as on 23 December 2020, before the market close at 10:30 AM GMT), with lower double-digit upside potential based on 11.25x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

OptiBiotix Health Plc

OptiBiotix Health Plc (LON: OPTI) is an AIM-listed life science Company. It is involved in the development and research of microbiome modulators mainly in the United Kingdom.

Investment Rationale – Speculative Buy at GBX 49.99

• The Company has extended its brand presence and geographic reach to more than 120 countries.
• In H1 FY20, the Company delivered a 400% increase in sales against H1 FY19, launched new products and signed a partnership with new retail partners.
• It is also exploring the potential for a dual international listing in the USA or other international markets.
• OPTI is expected to grow at a CAGR of 22.60% between 2020 and 2025.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.14x.
• From the technical standpoint, 14-day RSI stood at around 36.56, which is supporting the upside movement.

Key Risks

• The growth trajectory of the business could be impacted due to existing as well as emerging risks and uncertainties. Also, the increased competition can lead to the market share decline and income short fall.
• Moreover, the Brexit implications are causing higher costs, customer delays, longer lead times for customers, and longer product approvals.
• Adjacently, there are some operational risks arising from changing regulatory policies, loss of sensitive data through cyberattacks, and increased supply cost due to Covid-19 outbreak.

Recent News

On 9 December 2020, the Company announced that it is planning to appoint Christopher Brinsmead CBE as a Director of OptiBiotix Health.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 24 September 2020)

(Source: Company Website)

• In the first half of 2020, the Company has delivered strong and exciting progress, with a year-on-year 400% increase in sales and a large reduction in costs. While OPTI’s revenue was £744,821 and registered a five-time increase from H1 FY19.
• It has shown strong commercial protection to the group's science and brands, with a valuable global intellectual property portfolio of more than 70 overlapping patents and 68 trademarks.
• During the period, the Company has launched several products for various region, completed numerous partnerships and signed an agreement with Optipharm. This presents the Company with a large and expanding market opportunity.
• It is able to deal with uncertainty within the global economic environment as it is working multiple partners, across different application areas and geographies within the healthcare sector.
• On 30 June 2020, the Company had a cash balance of £1.47 million, with received £746,751 of investment income from the disposal of shares in SkinBioTherapeutics Plc.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In FY20, the Company expects continued revenue growth, due to the contribution of the existing deals and extending the application of the products into new areas as well as retail partners launch more products and extend their territories. In H2 FY20, it anticipates a reduction in administration costs, driven by the improved gross margins from royalty and license agreements and management costs are removed from the business. Further, it adds new products across the portfolio, such as LP_LDL® (which include more dairy products and expanding development of the cardiovascular health portfolio).

Moreover, the Company is expected to grow at a CAGR of 22.60% between 2020 and 2025. Meanwhile, the first half of 2020 was another period of exciting progress for the Company, with a large increase in sales and reduced other administration costs. While the uncertainty within the global economic environment will create challenges, but the Company has multiple partners, across different application areas and geographies within the healthcare sector, which continued further progress over the year. The stock made a 52-week low and high of GBX 23.20 and GBX 72.70, respectively.

Based on the decent growth prospects, we have given a “Speculative Buy” stance on OptiBiotix Health at the current market price of GBX 49.99 (as on 23 December 2020, before the market close at 8:45 AM GMT).

*All forecasted figures and Peers information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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