De La Rue buys some breathing space

Shares in De La Rue (DLAR) jumped by 10 per cent in early trading, after the banknote printer said market activity in currency was “showing encouraging signs of recovery”. This was a marked improvement on April, when the company lamented that banknote demand was at “the lowest levels for over 20 years”.

Progress has been made in other areas, too. After a tense start to the year, De La Rue has convinced its lenders to relax their interest cover and gearing covenant ratios, and has pushed back the majority of its pension deficit repair contributions to 2026-2029. Management said this “significantly improves the cash position for the company over the next few years”. 

In the here and now, however, the situation remains very difficult. After delaying its results, the group has reported an operating loss of £20.3mn for the year to 25 March 2023. This followed a 9.4 per cent fall in currency sales, as central banks used stocks built up during the pandemic. The authentication division didn’t perform that much better, increasing sales by just 1.6 per cent. 

De La Rue was hit with £47.1mn of exceptional charges, relating to the termination of a major supply agreement and the winding down of manufacturing in Kenya. More than half of these charges demanded cash payments, and £9.4mn has yet to be settled. 

Analysts at Investec said that De La Rue now has “trough potential” and is a small-cap recovery play. It stressed recent contract wins and the fact that authentication revenue is expected to reach £100mn this year, up from £91.7mn last year. We are not convinced, however. The group has repeatedly disappointed shareholders over the last 12 months, and only expects to turn a profit in the second half of financial year 2024 (first-half trading will be “broadly break-even at adjusted operating profit level”.)

Meanwhile, it is still borrowing money: net debt is expected to be around £100mn by year end, up from £83.1mn. While this might not breach its new gearing covenant of four times, it’s hardly comfortable in the current economic climate. (As of March, De La Rue’s debt/Ebitda sat at 2.2 times).

De La Rue may have bought itself some breathing space, but we fear that it will face major problems down the road. Sell.

Last IC View: Sell, 79p, 23 Nov 2023