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De La Rue disappointment to continue

De La Rue may have a licence to print money, but the road to riches is set to be a bumpy one for the banknote manufacturer.
April 30, 2015

The rating commanded by shares in banknote and passport printer De La Rue (DLAR) suggest that hopes exist for a recovery. But following several years of failure to revive the group's fortunes and a bleak outlook for the next two years, we think investors would be wise to give up the ghost.

IC TIP: Sell at 551p
Tip style
Income
Risk rating
Medium
Timescale
Long Term
Bull points
  • Undemanding share price
  • Decent dividend
Bear points
  • Increased competition
  • Falling margins
  • Two years of bad trading ahead
  • Weak solutions order book

Priced at just under 15 times Bloomberg consensus next-12-month EPS forecasts, De La Rue's shares trade some way above the 10-year average rating of 14.4 times, suggesting the market still has hopes the group can stage some kind of comeback. However, we don't think the chances of this happening any time soon are good. From as far back as 2011, management has been trying to implement a turnaround. Then the plan was to restore operating profit to £100m within three years and return annual revenue growth to its historic rate of 4 per cent. However, broker JPMorgan forecasts operating profits will be down to £60m by 2016 and will be accompanied southwards over the next few years by revenues, too.

Last September management warned that underlying pre-tax profit would be £20m below the level achieved in 2014 both this year and next. Profit in the larger, currency division has been squeezed by overcapacity within the printed banknote and paper market pushing down global paper prices. De La Rue produces its own banknote paper as well as printing on it. While this shelters it from international price hikes, it does not benefit when costs drop. Half-year pre-tax profit was down by almost a third on the previous year to £18.1m and the group slashed its half-year dividend by two-fifths to 8.3p.

The tough competitive environment in the banknote printing market shows no signs of abating, either. While the group renewed its 10-year contract printing its sterling banknotes in October, margins are suffering. Chief executive Martin Sutherland said the group had to "put its best foot forward" to secure the contract and the group is having to adopt a "more tactical approach" to pricing in order to maintain its market share.

Product innovation isn't helping De La Rue much, either. In 2013 the group launched its polymer substrate, Safeguard, capitalising on the increasing global popularity among state banks for more durable polymer banknotes. However, international banknote printers, such as Giesecke & Devrient of Germany and Oberthur of France, have also been investing, which has reduced opportunities in this market.

De La Rue also manufactures machine readable and e-passports as part of its solution business but take-up has not been as strong as expected. At the half-year stage the solution division's operating profit suffered a 39 per cent drop to £9.4m and prospects look grim based on a drop in the order book from £48m to £34m.

DE LA RUE (DLAR)

ORD PRICE:551pMARKET VALUE:£0.6bn
TOUCH:551p-553p12-MONTH HIGH:892pLOW: 467p
DIVIDEND YIELD:4.5%PE RATIO:15
NET ASSET VALUE:*NET DEBT:£127m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20125283331.842.3
20134844435.642.3
20145136047.342.3
2015**4975239.724.9
2016**4964937.324.9
% change--6-6 -

Normal market size: 2,000

Matched bargain trading

Beta: 0.9

*Negative shareholders' funds

**JPMorgan Cazenove forecasts