Introduction – Devro (LON:DVO) is a fast-growing manufacturer of collagen products for the food industry. The biggest application of their collagen products is casing for sausages (as an alternative to natural casing) but the company also makes related collagen films and gels as well as plastic casings that have medical uses. The company has manufacturing facilities in Scotland, the Czech Republic, the US and Australia with HQ in Scotland. 55% of sales are from European customers with the remainder split equally between Americas and Asia/Pacific. The technology in the product does appear to be of a sophisticated level however, I believe the company’s claim to be a “world leader” is probably unfounded to some degree (although Devro has played an important role in the industry since the 1960s) as Viscofan (listed in Spain) had sales of EUR 633m (around GBP 540m) in the LFY against DVO’s LFY sales of GBP 239m.
Operating Metrics – The most noticeable thing about the above table is the large increase in profits in FY2010 and to a lesser extent, the large increase in NOA in 2010. However, before we look at this more closely we should also look a bit further back as Devro has a more colourful history.
What we see from the above is that Devro’s results have been incredibly shaky at some points and that it is only in the past three years that performance has improved significantly. In other words, looking at the past five years alone isn’t too useful. The main issue around 2000 appears to have been an underperforming division which was experiencing shrinking sales with already slim margins. The result was a disposal in 2001 (leading to the gap between EBIT and Net margin) so it is only after 2002 that we are seeing a strictly comparable business.
Since then, the company has experienced compound annual growth of 6.2% in revenue, 3.37% in COGS, 3.77% in S&D (COGS and S&D are the two biggest cost items) resulting in 14.26% compound annual growth in net income. However, the majority of this has been achieved in the past three years. For example, the same figures over the past three years…
