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 announce the full-year results.

Rationale for Valuation – Speculative Buy at GBX 153.00

• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above 9.3% and 14.6%, respectively, in the last period.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are currently lower than the Food & Tobacco industry.
• On the liquidity front, the current ratio was 1.92x in H1 FY20, which is higher than the industry median.
• Also, the liquidity position stays strong, with the confidence to increase the investment for the future.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 155.20) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• In the COVID-19, the Company increased reliance on online platforms, which need to be maintained properly to avoid cyber-attacks or fraud, failing to do so will deteriorate the Company's reputation.
• The Company operates in highly competitive markets, which could adversely affect the Group’s results.

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.
• 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.
• On 13 November 2020, the net debt stood at £123.8 million, with normal seasonal cash generation.
• In July 2020, the Board announced an interim dividend per share of 2.7 pence, which will be paid on 15 January 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For FY20, the Company expects good growth in emerging markets. While in the mature markets, it expects broadly flat collagen volumes, with an estimated 2% net negative impact from COVID-19. It also expects a strong cash generation in 2021. 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.

Meanwhile, the Company has made good underlying progress in the period 1 July to 31 October 2020. Despite the market conditions to remain challenging for the rest of the year 2020, Devro remains on track to deliver against the expectations. The Company is focusing on the growth, customer relevance and a distinctive way of working across the business. DVO prospects appear to be decent, and 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 153.00 (as on 13 January 2021, before the market close at 11:35 AM GMT), with lower double-digit upside potential based on 13.10x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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