Risk-tolerant investors might use the downgrades-driven sell-off at sausage skins maker Devro (DVO) as a buying opportunity. Near-term challenges shouldn’t overshadow the £363 million cap’s status as a compelling play on growing protein consumption.

Moodiesburn-headquartered Devro is one of the world’s leading manufacturers of food industry collagen casings. From sites in Scotland, Australia, the US and the Czech Republic, the firm supplies a wide range of casings to makers of sausages, salamis, hams and other cooked meats.

With a world-class product range, the company is primed for profit in a global edible collagen market that grew another 7% in volume terms in 2013. This was driven by burgeoning protein consumption across emerging markets, where urbanisation is driving increased affluence and the newly-wealthy are acquiring a taste for Western diets.

Significantly China is already the world’s biggest collagen casing market and has seen demand grow 40% per annum on average since 2002. Constantly investing in product innovation, Devro is also spearheading a developed markets industry switch from costly natural sheep gut into collagen via its premium Select offering.

All that said, Devro has lost its sizzle amid a cycle of downgrades with the latest profits alert posted last month (28 Apr). The firm warned a combination of first quarter sales disappointments and earlier-than-anticipated restructuring costs would reduce 2014 profits
by about £8 million. Although sales have been strong in Germany, Japan, China and the US, Devro has encountered weakness in Latin America and Europe, adverse currency movements and Russia’s ban on EU pork meat imports hasn’t helped either.

This year’s volumes and prices are expected to be flat, though trading has picked up in recent months and input costs, including hide, have moderated. Moreover, management is bringing forward plans to concentrate manufacturing onto its most efficient technology. Though taking older lines out will hit this year’s profits, restructuring actions will pare manufacturing costs by £4 million in 2015. Furthermore, projects including a new US plant and a £50 million site in China will reduce manufacturing costs further from 2016.

Investec Securities’ Nicola Mallard forecasts a dramatic taxable profits slump to £28.5 million (2013: £41 million) on lower sales of £229.3 million (2013: £242.7 million) this year. However, the analyst believes profits can rebuild to £34.5 million on £236.7 million sales in 2015 ahead of a return to profits growth to the tune of £42.7 million in 2016. Income-hungry investors should also note Devro is forecast to deliver dividend progression to 9.2p (2013: 8.8p) this year ahead of a 9.9p shareholder reward next for a meaty prospective yield north of 4%.

A sell-off to 220.3p should attract contrarian investors, being paid more than 4% while they await Devro’s profits recovery.