De La Rue posts better than expected profit

After a series of profit warnings, De La Rue (DLAR) seems to have stabilised somewhat. The banknote printer achieved an adjusted operating profit of £7.9mn in the first half of its financial year, ahead of previous guidance of breakeven. Its net debt excluding leases was less than originally expected at £82mn and – after a tense couple of months when the company looked set to breach its covenants – its banking facilities have been extended to July 2025. It also managed to generate £15.4mn of cash from its operating activities, compared with an outflow of £2.8mn in 2022.

The shares still fell by 8 per cent in the wake of the results, however. "Significant operational uncertainties” remain in both the currency business and the authentication division, which provides security labels for the likes of cigarette companies. 

De La Rue’s statutory performance also left something to be desired. Total revenue dipped by 1.7 per cent to £162mn in the period, fuelled by a 2.6 per cent decline in the banknote business, and its statutory loss before tax widened from £15.9mn to £16.8mn. 

The balance sheet is looking increasingly stretched as well. Net assets sit at just £4.2mn and total equity attributable to company shareholders is negative. Meanwhile, long-term visibility around its loan arrangements is very poor and the group is paying 9 per cent interest on its current facilities, which is dragging on cash flow. Interest costs tripled in the period to £12.2mn. 

Looking ahead, De La Rue said it was still on course to hit its full-year forecasts, which include adjusted operating profits of roughly £20mn. Its authentication unit remains on track to hit its £100mn revenue target for the year, while the currency market is showing “signs of continuing recovery”. In April, chief executive Clive Vacher said demand for banknotes was at “the lowest levels for over 20 years”. The currency order book has doubled since September 2023 to £220mn.

Things do seem to be improving, therefore. A long history of profit warnings has made us nervous, however, and it is clear that De La Rue is not yet in robust financial health. Worries about the future of banknotes – and the potentially cannibalising effect of long-lasting polymer products – also remain unaddressed. Sell.

Last IC View: Sell, 41p, 29 Jun 2023