De La Rue's passport to digitalisation

It’s difficult to say if an improved marketing budget would have helped in the re-tender process for the £490m UK passport contract, eventually awarded to Franco-Dutch rival Gemalto. But the loss of the contract – along with the recent intervention of investment fund Crystal Amber – have highlighted the importance of enhancing De la Rue’s digital technologies to drive growth beyond its traditional competencies.

To this end, the group is moving away from producing entire passports in favour of “high-margin components and security features”. The change in approach was perhaps inevitable given that De La Rue will eventually lose market share in 2020-21 due to the UK passport contract loss, but an emphasis on ‘value add’ over volumes must be the way forward if the group is intent on bolstering operating margins. That process should also be aided by the expansion of the service offering for its DLR Analytics cash cycle management software, a product now in use by more than 70 central banks worldwide.

If profits were held in check by the preponderance of lower-margin jobs across the group, that’s set against “underlying growth in banknote revenues on increased volumes”. A marked increase in trade and receivables fed through to a £17.7m operating cash outflow at the half-year. That might seem a problem, with only £9.8m in cash on the books, although management cites timing issues on certain shipments and a one-off adverse movement following the sale of the paper business.

Bloomberg consensus gives pre-tax profit of £56m for the March 2019 year-end, leading to adjusted earnings per share (EPS) of 43.6p, rising to £60.3m and 46.8p in FY2020.