De La Rue changes tack

De La Rue (DLAR) is halfway through its turnaround plan. In late 2019, the banknote and security-label printer warned shareholders that there was material uncertainty about its future as a going concern, with trading in decline, a mounting pile of debt and worrying cash burn. Since then, things seemed to have improved somewhat.

Problems emerged for De La Rue when it lost its lucrative UK passport contract to a Franco-Dutch company. However – no stranger to reinvention – the group is now focusing on its authentication and currency divisions, which saw adjusted revenues rise by 28 per cent and 5 per cent, respectively, offsetting the passport blow. 

Polymer bank notes are expected to be an important source of growth. According to management, just 4 per cent of the world's banknotes by volume, and 14 per cent by denomination, are currently being issued on polymer, leaving plenty of scope for transitions. 

In a shrewd investment, the group has expanded its facilities in Westhoughton to meet the growing demand for polymer. It is also doubling the size of a manufacturing site in Malta to increase capacity for tax stamps and protection labels for the authentication division, and to boost its currency production. 

In spite of challenging conditions, the group has managed to reduce its net debt as a proportion of net assets by 16 percentage points. Meanwhile, the turnaround plan delivered £36m of annualised cost savings, with £7m more expected in 2021/22. Investec sees scope for a resumption of dividends by financial year 2023.

However, there could be stormy times ahead for the group. For starters, there will likely be headwinds in commodity and energy costs, in addition to supply chain challenges. Potential investors will also be aware that digital transaction have been on the rise, perhaps posing a long-term threat to the volume of notes in circulation.

Then there is the issue of activist investor Crystal Amber Fund, which owns a 10 per cent stake in De La Rue. On 22 November, the group lost a continuation vote at its annual meeting, meaning it now has to “reorganise, reconstruct or wind-up” its portfolio. If it is forced to offload its assets, this could be bad news for De La Rue as it could impact its ability to raise further capital. 

The group’s classic turnaround story could well contain a few more twists, therefore. Hold. 

Last IC View: Sell, 174p, 15 July 2021