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Questor: the shares may be unmoved since our tip but Devro’s divis tell a different story
Questor share tip: cost savings are coming through and there is plenty of long-term growth potential to add to the 5pc yield
It may not look like shares in sausage casing specialist Devro are on a roll – they are unchanged since our initial analysis in January 2017 – but last month’s interims offer more than enough to maintain our appetite for the Glasgow firm’s shares.
Cost savings are coming through, there is plenty of long-term growth potential and, perhaps best of all, the dividends keep on coming.
Devro declared an unchanged interim distribution of 2.7p a share. That adds to the 23.7p in divis we have already received over the past 33 months and there is the prospect of more to come. The consensus analysts’ forecast of a 9.3p full-year dividend for this year equates to a 5pc yield.
Earnings cover is lower than ideal but respectable enough at 1.7 times, and interest cover of more than 3.5 times gives further comfort as the balance sheet is not stretched relative to current levels of profitability.
In addition, cash generation improved nicely in the first half as pre-tax profits rose by 4pc year on year, thanks to strong volume growth in America and China, which offset tougher conditions in Japan and Latin America.
Devro is a leader in collagen casings and is thus a long-term play on increased protein consumption, especially in emerging markets. More immediately, the release of the more robust Ultra Fine casing, which can withstand deep frying, could provide some further sales momentum in the second half of this year.
Income-seekers are being rewarded for their patience with this one and on barely 12 times forecast earnings and that 5pc yield the shares look good value.
Questor says: hold
Ticker: DVO
Share price at close: 186.8p
Update: TI Fluid Systems
One of this column’s favourite aphorisms is that “a bad stock in a good sector will tend to outperform a good stock in a bad sector” and we may have erred in ignoring this in the case of TI Fluid Systems, tipped here in May. However, the valuation is low enough, at around seven times forecast earnings, and the yield plump enough, at 4.6pc for 2019, to merit support for now.
The automotive systems and technology firm’s expertise in heat management and pressurised fuel tanks could make it a long-term winner as car demand tilts toward hybrid and electric vehicles, not a loser as the valuation implies.
But in the short term, the news on global automotive demand remains unremittingly grim. This was reflected in this month’s interims, when sales fell by 3pc and adjusted operating profit by 14pc, and management’s assertion that sales would continue to outperform global car output growth, excluding the impact of currency movements, fell on deaf ears as the shares skidded lower.
Investors will have to buckle up as the stock is likely to be volatile, but there is still long-term potential and yield support here.
Questor says: hold
Ticker: TIFS
Share price at close: 178.4p
- Read Questor’s rules of investment before you follow our tips
Update: Marston’s
A bid for Greene King, last tipped by Questor a year ago, suggests we may not be alone in thinking that there is value to be had in the cash-generative pubs sector, especially if a company has freehold assets on its balance sheet.
We will therefore happily stick with our advice to buy Marston’s, the brewer and pubs and hotels operator, whose plan to cut debt by £200m during 2020-23 will support a fat yield of 6pc and reduce risk.
A reduced debt pile could also attract a bidder as any buyer would inherit fewer liabilities but we must stress that this is not central to our investment case: the stock looks attractive in its own right.
The 850p-a-share cash offer for Greene King values it at 13.4 times forecast earnings, so Marston’s figure of just 9.3 times suggests that shares in the brewer are decent value.
Questor says: hold
Ticker: MARS
Share price at close: 127.5p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
