De La Rue's recovery stalls as it warns on profits

De La Rue (DLAR) is in the midst of a turnaround plan that’s taking a turn for the worse. Operating profit for 2022 was originally expected to reach £45mn-£47mn. In January, however, the bank note printer downgraded expectations to £36mn-£40mn. In the end, its results limped over the finish line at £36.4mn. 

The board has now warned that adjusted operating profit for 2023 will be broadly flat versus 2022, and weighted towards the second half.

The company, which specialises in polymer bank notes and authentication products, attributed its lacklustre performance to a series of external factors. Supply chain issues, Covid-related absences, inflation, and dawdling governments meant operating profits in its two key divisions grew by just 30.2 per cent, against an original target of 65 per cent. 

Even this growth was offset by the decline of De La Rue’s identity solutions business, which is being gradually fazed out. Total adjusted operating profit fell, therefore, by 4.5 per cent.

Investors are not impressed: shares in De La Rue are down by more than a third compared with the start of the year. It’s not all doom and gloom, however. It’s clear, for example, that the group’s turnaround plan – which aims to stabilise and increase the efficiency of banknote production – is making a difference. Revenue from the currency division dipped in 2022, but adjusted operating profit still rose by a fifth. 

Management said demand for banknotes has fallen to lower-than-normal levels after surging during the pandemic. (People wanted to stock up on cold, hard cash, it seems). If demand does bounce back to normal levels, future profit growth could quickly accelerate. 

De La Rue has also managed to diversify its customer base. The company used to be heavily dependent on a small number of large clients – hence why the loss of its UK passport contract to a Franco-Dutch firm proved so devastating. Now, however, no single customer accounts for more than 10 per cent of its annual revenue.

Its historic pension problems have also eased somewhat. A new actuarial valuation revealed a reduced scheme deficit of £119.5mn, compared with a previous figure of £177mn. Management said this should result in a £57mn reduction in cash payments between 2023 to 2029.

In the near term, things aren’t looking great for De La Rue, as macroeconomic pressures thwart the group’s cost-saving goals. However, its turnaround plan still looks like it could bear fruit. Hold.

Last IC View: Hold, 108p, 24 Jan 2022