Devro, a leading maker of sausage skin using collagen is facing operational difficulty, especially when management expects sales volume to tumble by 10% next year. This is on top of having spent hundreds of millions upgrading and expanding their operations for the past two to three years.
Meanwhile, the shares have half and trade close to five-year lows. Given the fact it specialises in a niche area, would this be a worthwhile investment you should grab with both hands, or do you wait for the opportunity to come.
Below are ten facts about Devro:
Fact 1: The good news is having spent £110m over two years on upgrades and expansion it is likely there will be lower capex in the future. Devro’s 2016 interim results saw capex fell to £11m from £33m last year.
Fact 2: This downgrade in business has led it to impair £20m of its assets value and expectation of over-capacity in 2017 meaning higher costs.
Fact 3: Devro has failed to grow its market capitalisation in the past 20 years because the business was much bigger today (Turnover in 1996: £302m; Turnover in 2015: £230m).
Fact 4: Despite the 50% fall in share price, Devro’s P/BV and P/S is trading at 2.3X and 1.75X, respectively, but in 2001 it was 1X and 0.5X, respectively (the lowest valuation recorded).
Fact 5: The 10% decline in sales is the biggest decline since 2001.
Fact 6: Asset turnover has half and trade payables, as % of the total assets decline from 20% to 8%. It could imply Devro’s assets are underutilised (hence the lack of sales growth), or overvaluation.
Fact 7: Nobody knows the effect of a 10% decline in sales would affect Devro’s business. But one meticulous observation is since 2012, Devro’s revenue has fallen by 4.6%. At the same time, operating cash flow earnings decreased by 40% from £42m to £26m.
Therefore, one could conclude a sudden 10% drop in sales would mean negative operating cash earnings.
Fact 8: Devro’s total debt is at their highest ever with the total at over £160m. But, comparing it to debt to equity it is over 1.4 times and debt coverage from operating cash flow is down to 0.2 times (2015’s numbers) from 2 times. This is lower than 2001.
Devro’s share price does not respond well to increasing leverage,…
