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Will De La Rue delay?

De La Rue shares are near record highs and trade at a big premium despite a worrying outlook. Time to take profits.
November 22, 2012

Bank note printer De La Rue (DLAR) came out with a profit warning in its latest trading update. Couple that with worrying signs about the printing market contained in the detail of the statement and De La Rue's acute sensitivity to changes in production volumes, and we think it's time to take profits after a great run in the share price since early 2011.

IC TIP: Sell at 1011p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • Profits set to bounce in 2013-14
  • Contracts delayed not cancelled
Bear points
  • City analysts slash forecasts
  • Shares near record highs
  • Rising costs of restructuring plan
  • Banknote paper market worsening

De La Rue was having a good year until the contract delays. Revenue in the first half of 2012-13 was up 3 per cent to £245m, and management's first take is that operating profits will be up 5 per cent to £33m; both these figures beat City analysts' expectations of revenue of around £241m and profits of around £30m.

But delays in sealing some significant orders are a concern. De La Rue's bosses now think that, even if these orders do come through in the coming weeks, they will be too late to save this year's numbers. Broker Panmure Gordon slashed adjusted pre-tax profit forecasts from £77.8m to £57.1m, cutting EPS by more than a quarter to 42.7p. Management is confident the delayed orders will come through next year so Panmure, along with many others, thinks the long-term impact will be limited and left its 2013-14 forecast of £95.4m profit and EPS of 71.7p unchanged.

DE LA RUE (DLAR)

ORD PRICE:1,011pMARKET VALUE:£1.01bn
TOUCH:1011-1012p12M HIGH:1,080pLOW: 851p
DIVIDEND YIELD:4.2%PE RATIO:29
NET ASSET VALUE:n/aNET DEBT:£25m

Year to 31 Mar Turnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200950296.150.941.1
201056196.671.042.3
201146472.867.642.3
201252832.931.842.3
2013*50146.334.742.3
% change-5+41+9nil

NMS: 2,500

Matched Bargain Trading

BETA: 0.4

*Investec Securities estimates

There were also hints of a more difficult market ahead for De La Rue. While banknote printing volumes were up 4 per cent to 2.9bn notes, production of banknote paper was down 15 per cent to 4,500 tonnes, reflecting the impact of extra competition. If volumes are under pressure, then prices are likely to fall. For a company such as De La Rue, which has very high fixed costs, just a small slip in volumes can hammer profits.

Chief executive Tim Cobbold is still confident that management's plans will deliver operating profits in excess of £100m in 2013-14. In a way that target has been made easier – if management is right and delayed contracts materialise next year, while costs stay largely the same, operating profits could lift off. But forecasting over a year into the future can be tricky, who knows what else could happen? All we do know is that contracts are delayed, exceptional costs from the improvement plan have risen by £10m, the banknote paper market is more challenging and the order book is flat at £248m.