Having completed its capital investment projects, Devro’s manufacturing footprint is now aligned to customer demand and should allow growth in more profitable areas as management purposefully moves away from the oversupplied low-price segment. The transition was complex and there is still more work to do, especially in Latin America. Devro has now commenced a new programme, Devro 100, to accelerate sales and profit growth in order to make the most of the new capacity.
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Devro |
Returning to growth?
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Consumer |
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7 March 2017 |
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Having completed its capital investment projects, Devro's manufacturing footprint is now aligned to customer demand and should allow growth in more profitable areas as management purposefully moves away from the oversupplied low-price segment. The transition was complex and there is still more work to do, especially in Latin America. Devro has now commenced a new programme, Devro 100, to accelerate sales and profit growth in order to make the most of the new capacity.
Where next?
FY16 results were broadly in line with expectations. While volume declines are always disappointing, they were due to a series of region-specific factors that have mostly been addressed; there should therefore be a return to growth in 2017. Demand in Devro's end markets remains strong, and its new high-technology manufacturing capabilities should allow the business to grow.
Return to growth?
The key challenges for 2017 are the continued ramp-up of volumes at the new plant in China and addressing the problems in Mexico, where the newly redesigned products are not currently meeting customer needs. If these are successfully delivered, we should see good volume growth across the board. Given the operational leverage inherent in the business, there is the potential for material profit growth over the next few years. The Devro 100 programme has been initiated to accelerate delivery of revenue and profit growth. The next generation of differentiated collagen products is set for launch in H217 and Devro 100 will aim to further improve manufacturing efficiencies and reduce unit costs. While payback on the Devro 100 programme is very attractive, the risk with all company programmes is the disruption to the business and the short-term exceptional costs.
Valuation: Potential growth not priced in
Trading at consensus FY17e P/E of 13.5x and dividend yield of 4.5%, Devro continues to be valued at a discount to its global peers, most notably Viscofan. Profitability should improve from here, and the Devro 100 programme should provide a platform on which to build further growth. A re-rating is obviously conditional on the successful delivery of the growth story, now that the transformation is largely complete.
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Consensus estimates
Source: Bloomberg. Note: Actual adjusted PBT and adjusted EPS figures include pension interest (£2.3m in FY16), whereas consensus forecasts mostly exclude pension interest. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Disclaimer
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Disclaimer
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Hutchison (HCM) and partner Lilly announced positive, top-line pivotal phase III trial results for fruquintinib in 3rd line colorectal cancer. The China based FRESCO study evaluating 416 patients who had failed at least two prior chemotherapies in CRC demonstrated a clinically meaningful and statistically significant increase in both overall survival and progression-free survival compared to placebo. Consequently, HCM is preparing for a China NDA submission mid-2017; this represents the first China based oncology innovation to succeed at Phase III. We expect the full data to be presented at the 53rd American Society of Clinical Oncology Meeting (ASCO) 2 to 6 June 2017. Our valuation remains unchanged at $2.4bn.