Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Devro - the sausage skin maker surely looks like classic take-out candidate.

Having participated in the new issue of Hilton Food Group this week I also had a look at Devro, the maker of casings for sausages, hams and other processed meats.

The group recently announced that trading for the year-to date has been mixed, with the more mature markets (UK, US and Australia) being slower to gather momentum, while the developing markets have been buoyant. It concluded that it was confident about its prospects-aren’t they always!

A potential acquirer had arrived on the scene in January offering 150p a share for the business. Unfortunately in April the group came out with the announcement that they had been unable to reach agreement in relation to the pension scheme and that discussions between the Board and the potential offeror have been terminated.

The shares naturally tumbled from a high of c147p and are currently trading at 116p.

Devro surely has all the appearances of a classic take out candidate.
A highly cash generative business with manageable levels of gearing that has a very strong position in its market. The shares are also currently yielding over 4%.

I acknowledge there are plenty of negatives such as US$ exposure, impact of high energy prices, falling demand for meat products, the pension deficit, changes in foods standards, to name but a few.

All in all, it looks a fairly stodgy low growth business, but someone was clearly interested enough a few months ago to offer 150p a share. Furthermore, the pension position should have improved dramatically over the past few years, energy costs have stabilised, developing markets are growing and recent investment is starting to bear fruit……and there is always all that lovely cash to get excited about.


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