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De La Rue nears the brink

The stricken banknote printer has suspended its dividend
November 26, 2019

De La Rue (DLAR) has suspended its dividend amid management concerns that a failure to address its escalating debt pile could topple the banknote printer.

IC TIP: Sell at 136p

A fall in overspill demand (printing for central banks that can no longer print money quickly enough themselves) drove De La Rue into a pre-tax half-year loss, exacerbated by “customers' irregular buying patterns and rapid demand changes”. A drop in customer demand has created over-capacity in the industry, which has put pressure on margins and reduced the group’s order pipeline. De La Rue also recorded £8.2m in restructuring charges linked to its reorganisation into two divisions – authentication and currency – which was launched earlier this month.

New chief executive Clive Vacher acknowledged the turmoil surrounding the group’s leadership. De La Rue’s former chairman Philip Rogerson, chief executive Martin Sutherland, senior independent director Andy Stevens and most of its executive team quit or resigned in its half-year. “This has led to inconsistency in both quality and speed of execution,” Mr Vacher admits, adding that it “will take some time” for the new management team to bed in.

De La Rue intends to accelerate its three-year £20m cost-cutting programme, and its £8.2m in exceptional reorganisation charges were dominated by the expected cost of reducing headcount. It has also revised its full-year forecasts and modelled a series of “plausible downside scenarios”. As things stand, management believes the group can continue to operate within its banking covenant ratio of a limit of three times net debt to cash profits. It currently sits at a multiple of 2.72. 

The group’s more pessimistic forecasts considered the impact of a weak trading environment and the “binary nature of the large currency contracts that underpin the group's business model”. A failure to secure necessary cost savings, weak performance and the timing of revenue recognition factor among De La Rue’s doomsday scenarios.

Should the group fail to avert more than one of its most severe scenarios, it would breach its banking covenant limit. Management has therefore “concluded there is a material uncertainty that casts significant doubt on the group's ability to continue as a going concern” and has suspended the dividend accordingly.

Consensus forecasts compiled by Bloomberg are for full-year 2020 earnings per share of 26.4p, rising to 27.6p in FY2021.

DE LA RUE (DLAR)   
ORD PRICE:136pMARKET VALUE:£141m
TOUCH:136-137p12-MONTH HIGH:493pLOW: 132p
DIVIDEND YIELD:12.3%PE RATIO:45
NET ASSET VALUE:*NET DEBT:£170.7m**
Half-year to 28 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20182587.15.18.3
2019232-12.1-10.70.0
% change-10---
Ex-div:na   
Payment:na   
*Negative shareholder equity **Excludes lease liabilities of £15.1m