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De La Rue shares shredded on profit warning

The bank note printer is facing an even harder road back due to the pandemic
January 24, 2022
  • Profits downwardly revised for the March year-end
  • Pandemic-linked disruption stalls turnaround plan

One step forward, two steps back. Not for the first time in its history, De La Rue (DLAR) delivered a negative trading update, this time just over halfway along its turnaround plan.

Shares in the Hampshire-based group lost nearly a third of their value in early trading after it guided for adjusted operating profit of £36m-£40m for the year to 26 March. The range is in line with its previous financial year but below the market consensus of £45m-£47m.

De La Rue, which specialises in polymer bank note production and authentication products, also announced that ongoing supply chain issues would result in a 12-month delay to its turnaround plan.

Matters seemed to be progressing well enough given that the group registered an increase in statutory profits at the half-year mark. But the plan was initiated just before Covid-19 took hold in the UK and the subsequent commercial disruption wrought by the virus has stalled progress.

Despite the improved interim showing, profitability is still being constrained by external issues, not least of which is the dearth of semiconductors and an accompanying increase in raw material prices. Management also had to contend with a marked increase in absenteeism. The residual impact of the problems is forecast to stretch into the following financial year.

The turnaround plan was designed to help the group overcome the highly-publicised loss of its UK passport contract to the Franco-Dutch firm Gemalto, somewhat ironic given its post-Brexit significance.

De La Rue has also been subject to the attention of Crystal Amber since 2018. The activist investor holds an 11.4 per cent stake in De La Rue, according to FactSet data, but it could be forced to dispose of all of its strategic stakes due to the intervention of Saba Capital, which acquired a 26.2 per cent share in the fund and voted against its continuation last month.

We can’t be sure De La Rue’s valuation won’t come under further pressure due to an enforced sale on the part of Crystal Amber, but the group’s fixed cost base has been pared back significantly since the dark days of 2019 when a break-up of the assets might have seemed a realistic proposition.

Management points that despite the downward revision, we can expect an increase in adjusted operating profit across both divisions. However, shareholders would be well advised to determine whether the group records a commensurate increase in cash flows at the operating level. Hold at 108p.

Last IC View: Hold, 159p, 24 Nov 2021