Small Cap Value Report (6 Mar 2017) - DVO, UPGS, GAW

Monday, Mar 06 2017 by

Good morning!

News is quiet today so I'll be taking care of things myself here while Paul takes a day off.



Devro (LON:DVO)

Share price: 181.4p (-2%)
No. shares: 167m
Market cap: £303m

Final Results

There are some big differences between the underlying and statutory results today from sausage skin maker Devro.


Statutory (or as I like to call it, actual) operating profit comes in at £15.4 million, down from £19.2 million.

Note that constant currency revenues fell this year (by almost 7%), but were more than offset by FX gains.

Dividend: Maintained. Covered by the underlying EPS but not by actual EPS.

Alternative Performance Measures: See explanation below.

Devro is undergoing a major transformation including the construction and start-up of two new plants in China and the US which completed in 2016, a restructuring of operations in Scotland and Australia initiated in 2014 and the Devro 100 programme which will continue until 2018.  The incremental costs associated with implementing this transformation are significant, and as a result have been classified as exceptional items.

What to make of this?

Potentially reasonable, except that it's a multi-year programme and so it becomes a bit of a stretch to have a big difference between underlying and reported results over several years.

This is the gap between underlying (or "before exceptional items") EPS and actual EPS since 2013:


Net debt has also been rising sharply, up from just £36 million in 2013 to £154 million today.

Using the underlying profit measures, the company thinks it has been earning a return on capital employed over the last two years of c. 11.5%, which is ok if not spectacular.

My opinion

Checking the footnotes, I see that £20 million was spent during the year to establish new manufacturing plants, versus £11 million last year.

While I'm not sure about the other exceptional items, I can see the rationale for excluding these set-up costs from the underlying numbers.

I also see that cash flow was pretty strong (£39 million from operations), although more than a third of this was spent on taxes and interest and the rest was used up in capex, so that the company effectively had to borrow to pay the dividends.

Overall, it's hard for me to get too excited about potentially investing here.

The underlying quality does not seem to be fantastic, the investment programmes are expensive, and…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


All my own views. I am not regulated by the FSA. No advice.

Do you like this Post?
60 thumbs up
0 thumbs down
Share this post with friends

Devro plc is a United Kingdom-based manufacturer of collagen products for the food industry. The Company conducts its operations through three segments: Americas, Asia-Pacific and Europe. The Americas segment includes the Company's operations in North America and Latin America. The Asia-Pacific segment includes the Company's operations in Australia, New Zealand, Japan, China and the rest of South East Asia. The Europe segment includes the Company's operations in Continental Europe, the United Kingdom, Ireland and Africa. The Company's collagen casing is used to manufacture all varieties of sausage. The Company sells directly to food manufacturers and via agents and distributors. The Company's products include edible casings, such as Devro Fresh Butchers, Devro Fresh Link and Devro Fresh Premium; non-edible casings, such as Cutisin; films, such as Edicol A and Edicol MX, and plastics, such as Ralex Mini Ralen, Ralex Mini Smoke and Ralex Ralex. more »

LSE Price
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

Games Workshop Group PLC designs, manufactures and sells fantasy miniatures and related products. The Company's segments include Sales channels, Product and supply, Central costs, Service centre costs and Royalties. The Sales channels segment includes Trade, which sells to independent retailers and includes magazine newsstand business and distributor sales from its publishing business (Black Library); Retail, which includes sales through retail stores, its visitor center and global exhibitions, and Mail order, which includes sales through its Web stores and digital sales. The Product and supply segment designs and manufactures products and incorporates production facility in the United Kingdom. The Central costs segment includes its overheads, head office site costs and costs of running Games Workshop Academy. The Service centre costs segment provides support services and undertakes strategic projects. The Royalties segment includes royalty income earned from third-party licensees. more »

LSE Price
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

  Is LON:DVO fundamentally strong or weak? Find out More »

17 Comments on this Article show/hide all

billytk 6th Mar '17 1 of 17

Hi Graham. If you get chance could you take a look and offer any opinion of new issue £UPGS

Looks like a high growth small cap

| Link | Share | 1 reply
dfs12 6th Mar '17 2 of 17

Hi Graham, I'd be interested to hear what you make of the takeover of Shawbrook (LON:SHAW). Do you think this might go higher or fall apart? I'd like to think that as they haven't said its a done deal yet there is a slight chance it might go higher. I'm a tiny bit surprised the price hasn't jumped closer to the takeover price being quoted and I'm also surprised the read across to other challenger banks hasn't been bigger e.g. OneSavings Bank (LON:OSB). Perhaps a result of the market having a bit of a flat period after good gains? I wonder what you think?

| Link | Share | 1 reply
runthejoules 6th Mar '17 3 of 17

Everyone's going vegetarian, who'd invest in sausages?

| Link | Share | 1 reply
JohnEustace 6th Mar '17 4 of 17

Thanks for the Devro analysis. I'll be staying well clear.

| Link | Share
andrea34l 6th Mar '17 5 of 17

There's another positive trading update from GAW if anyone is interested...

Games Workshop is pleased to announce that the sales and profit growth, that was discussed in the January 2017 trading update, continues. Income from royalties receivable is also ahead of expectations. In light of the above, profits for 2016/17 are likely to be materially above market expectations

| Link | Share | 1 reply
stepone 6th Mar '17 6 of 17

In reply to post #174281

Veggie sausages need skin as well!

| Link | Share | 1 reply
biloseli 6th Mar '17 7 of 17

In reply to post #174293

I think Devro's sausage skins are made from collagen from animals.

| Link | Share
Graham Neary 6th Mar '17 8 of 17

In reply to post #174272

Covered it for you Billy, cheers for the suggestion

| Link | Share | 1 reply
RichardK 6th Mar '17 9 of 17

In reply to post #174287

Thanks for the good news re GAW Andrea. Missed it as it appeared at 11.51. I hold.


| Link | Share
Ups1de 6th Mar '17 10 of 17

In reply to post #174278

Interesting that Friday's announcement stated that 'it was not made with the consortium's approval'....could SHAW be trying to flush them out ? What might happen if consortium backed off ?

| Link | Share
mcfly46 6th Mar '17 11 of 17

are charts down for anyone else?

| Link | Share
Michael Billingham 6th Mar '17 12 of 17

Games Workshop (LON:GAW)

Thank you Andrea,

Good news, I've topped up my holding.


| Link | Share
Graham Neary 6th Mar '17 13 of 17

Andrea - cheers for bringing up GAW, comment has been added.

| Link | Share
IGotPoesJacket 6th Mar '17 14 of 17

GAW - as a one time player of their products I wonder how much long term value they're going to generate.
Hopefully, without being too boring on the details - they've pulled this storyline stunt before in the "Warhammer" Universe - this then led to a revolt amongst the players when they removed the "Warhammer" title and replaced it with "Age of Sigmar". They alienated a huge amount of the player base and many (like me) have never returned.
With their "Return of the Primarchs" storyline in the "40K" universe, which presumably will culminate in another universe shattering outcome, they might sacrifice the goose of ye golden eggs. It's all very well attracting a younger player base, but teenagers generally don't have much money!

Short term looks good, I'd be wary about the longer term. Especially as, contrary to popular opinion on a lot of forums I read, they do face serious competition from companies like Fantasy Flight Games who have a range of Star Wars based games who could well steal a huge amount of players from GAW (whose IP is somewhat limited in marketing potential).

As stated above, I am a disgruntled former customer (who used to spend literally hundreds if not thousands pa on product) of the company so treat my comments accordingly...

| Link | Share
peterthegreat 6th Mar '17 15 of 17

Thanks for the comments on Games Workshop from Graham and others. I have been watching this company for some time but have never quite made the decision to invest because I don't understand why its products are so popular but I guess that is just because I don't share to same interests as wargamers, so perhaps I should ignore my concerns here. I have always admired the company's ROCE and profit margins but the thing which has finally persuaded me to buy is the increasing level of royalties generated by its characters. If the company can cash in on the huge level of interest of fantasy characters as demonstrated in films and computer games this could make a big difference going foward, but regardless of this, the core business seems to be going well. I also like the fact that it is conservatively and transparently, with plenty of information being given to strategy.

| Link | Share
Miserly Investor 6th Mar '17 16 of 17

Thanks Graham.

An observation on Devro (LON:DVO):

"Using the underlying profit measures, the company thinks it has been earning a return on capital employed over the last two years of c. 11.5%, which is ok if not spectacular."

But it seems they are "having their cake and eating it" when it comes to adjusting performance measures.

As you point out, DVO are adding back large exceptional items year on year due pre-operating costs for new manufacturing plants. Management presumably argue that such costs are capital in nature rather than reflective of the underlying operating performance.

Okay, so let's take their point for one moment. If this is the case, those same amounts should be adjusted back into the asset base for the purpose of calculating return on capital employed. As far as I can see, they do not.

So, exclude costs from adjusted EPS because they are capital, but don't adjust the capital base in the ROCE calculation. How convenient! ROCE is therefore overstated in my opinion.


| Link | Share
billytk 6th Mar '17 17 of 17

In reply to post #174302

Thanks for covering £UPGS Graham. I bought a starter position in them in the unconditional period last week for circa 147p after taking a look at the prospectus. My immediate observation / concern was the reason for listing being a selling party which is never the best scenario. I read several misrepresentations of this at the time saying that the company was listing to fund expansion. It just shows how much of a cut and paste job these so called journalist outlets are. They have however just taken on a large warehouse for expansion so perhaps crossed wires.

Management have a big stake in the game here but there is also a decent free float. The 3% and above shareholders have the usual Blackrock and Miton plus there are tie ins for the remaining stake holders. I’d be interested to get further insights but the growth trajectory seem to be in the right direction and if the likes of £G4M and Purplebricks (LON:PURP) can be achieving stratospheric valuations then perhaps....

I’m keen to know more details on their licensing and renewal terms

Divi’s are hinted at for 2017 H2. 50% of post tax profits are muted at for the full year. I’m inclined to carefully monitor any divi announcements from new floats. Thinking of DX (Group) (LON:DX.) Entu (UK) (LON:ENTU) Lakehouse (LON:LAKE) All promised big but floundered. Taken at face value this appears appealing initially

| Link | Share

Please subscribe to submit a comment

 Are LON:DVO's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis