UK Edition
Questor: hold on to Devro and enjoy the 3.8pc yield while you wait for the turnaround
Shares in sausage skin maker Devro have risen by almost a quarter since we picked up a forkful of the stock in January, and this month's interim results suggest the firm is capable of serving up further tasty returns in the form of capital gains and dividends.
Although currency movements helped, it was encouraging to see an 11pc jump in first-half sales to just over £125m, helped by strong demand in Russia, south-east Asia and China, where the firm has a new plant.
That facility is weighing on return capital at the moment, but Devro maintained a high cash conversion despite the sizeable capital outlay. Although pricing in China remains competitive, the volume benefits are considerable and profits, cash and return on capital should all improve as the plant's output increases.
Peter Page, chief executive, expects the site to reach full capacity by the end of the year. In addition, Page's "Devro 100" programme is ahead of target, with £6m in cost savings expected for 2017 against a £3m-£4m budget. This will help it reduce debts, as a possible covenant breach was a key concern after last year's profit alerts.
The decision to leave the interim dividend at 2.7p bodes well, as an unchanged total of 8.8p makes the yield 3.8pc. So investors are being paid to wait while the turnaround moves ahead and Devro positions itself to capitalise on increased demand for protein in new markets and the ongoing shift towards collagen sausage casings.
Questor says: hold
Ticker: DVO
Share price at close: 235p
Key numbers (Devro)
Market value: £389m
Yield (Dec 2017 estimate): 3.8pc
Turnover (Dec 2017 estimate): £252m
Pre-tax profits (Dec 2017 estimate): £31.4m
Net debt (Jun 2017): £243.7m
Return on capital (Dec 2016): 5.7pc
Cash conversion ratio (Dec 2016): 94pc
p/e ratio (Dec 2017 estimate): 17.4
Update: Cineworld
A 10pc jump in admissions, 24pc rise in statutory operating profit and healthy 15pc increase in the interim dividend mean that last week's first-half results from Cineworld look better than the market had feared.
The shares' subsequent rise helped to justify our faith in the stock and this could just be the curtain raiser, given a strong second-half release schedule, and the long-term benefits of a UK cinema refurbishment programme and site openings in Britain and overseas.
The numbers suggest that spring's share price weakness was unmerited, so investors should keep the faith.
Questor says: hold
Ticker: CINE
Share price at close: 718p
Update: Interserve
A messy set of interims, marred by further "exceptional" items, whose consistent presence suggests they are anything but, appears to support our sceptical view of support services firm Interserve, first outlined in December when the shares were trading just above 300p.
Investors will be hoping that the arrival next month of Debbie White, the new chief executive, from another support services giant, Sodexo, as well as a new chief financial officer, can spark an improvement in trading.
A "strategic review" of some kind is surely on the cards and could lift the shares, but the company's accounts feature some classic red flags - a restatement of last year's figures, those recurring "exceptionals" and impenetrable footnotes, of which one example follows: "The construction of energy from waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of equipment services, along with directly associated costs, are considered to be exited businesses.
"Exited businesses are presented as exceptional items and are excluded from the calculation of headline earnings per share ... The exited businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within exceptional items differ from those applicable for discontinued operations."
Cutting out such cackle and improving transparency and visibility would be welcome first steps from White when she arrives.
That footnote is just one of many in the interims and it tells investors all they need to know: this remains a company whose operations are complex and whose accounting is dense. Lofty debts are a further reason to stay clear.
Questor says: avoid
Ticker: IRV
Share price at close: 194.5p
Russ Mould is investment director at AJ Bell, the stockbroker