Devro enters period of financial risk

Scottish manufacturer of sausage casings, Devro, is entering a phase of "operational risk”, according to the investment management firm Shore Capital. 

After cutting 350 people from its workfroce in Scotland and the US earlier in March, analysts are bullish of the North Lanarkshire firm’s long-term future, but remain anxious over a raft of short-term challenges home and abroad.

One of the risks facing Devro is its ability to implement the “delicate and sensitive” manufacturing process at new sites in the US and China, says Shore Capital. This process can be greatly affected by slight changes in climate, humidity and raw materials. And when one factors in a relatively inexperienced production team, Shore Capital believes it may be challenging for Devro to deliver short-term profit.

The FTSE 250 company is two-thirds of the way through a global manufacturing transformation and 2016-17 will see it open new plants in China and the US. So far it has pumped £110m into the two sites - split £50m on the US and £60m on China. But Shore Capital says there is “uncertainty” over when Devro can meet its £14m pre-tax profit target for the new sites.

Devro CEO, Peter Page, even conceded in a meeting with Shore Capital that the company expects to see some “bumps in the road” moving forwards. However, Shore Capital says its “medium-term confidence” in the company’s ability to realise its profit target remains strong.

Shore Capital expects the £14m pre-tax profit to be achieved around 2018, with £8m to come from the US plant, and £6m projected for China.

“We’re not worried about the US being able to deliver the full £8m as this is all about cost-saving – they don’t need to win new business to achieve those savings,” said Shore Capital analyst Darren Shirley.

“In China, China is going to start producing in Q4 this year and will start to build up volumes of production over the next couple of years. My estimate is that by the end of 2018, a fair proportion of the £14m EBIT benefits will be realised.”

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