De La Rue downgrades forecasts - again

The three-year turnaround plan introduced by De La Rue (DLAR) in early 2020 “saved” the company, according to chief executive Clive Vacher. Quite how well the rescue mission panned out is another story.

The banknote printer has warned on profits for the third time in 10 months, saying that adjusted operating profits for the full-year are likely to be between £30mn and £33m – down from £36mn in the year to 26 March 2022. On a statutory basis, it fell into a loss for the first half: the termination of a contract with a paper business resulted in one-off charges of almost £20mn, which dragged the company into the red.

Neither of De La Rue’s core businesses - currency and authentication - seem to be thriving. Vacher is right that the authentication division has increased sales at a decent clip over the past couple of years, but growth has stalled. Divisional revenue crept up by just 2.5 per cent in the period, and adjusted operating profits dropped by 44 per cent to £4.9mn. Management blamed this on an unfavourable sales mix and supply chain problems, but a new managing director has been roped in to improve the situation. 

Meanwhile, currency revenue tumbled by 12 per cent, which management blamed on a “subdued market”. In other words, while banks bought lots of new notes during lockdown, they are now working through their stock. There could be a bigger problem, however. In an open letter to De La Rue this month, activist investor Crystal Amber accused the group of “cannibalising the traditional banknote business”, because polymer products last so much longer than paper ones. 

Worries about currency contracts prompted auditor EY to set out a “severe but plausible downside scenario” in which De La Rue breached its debt covenant. “Therefore, there is a material uncertainty that may cast significant doubt on the group's ability to continue as a going concern,” the firm said. 

To top off the group’s troubles, Crystal Amber is trying to oust De La Rue chair Kevin Loosemore. A general meeting will be held on 2 December, where shareholders will vote on whether Loosemore should continue in post. De La Rue’s board said it was “disappointed”, particularly in light of the “overwhelming support” received from shareholders for his re-election this summer.

Management is adamant that success is just around the corner and that the next financial year will be a “big milestone” for De La Rue. Vacher stressed, for example, the group’s commitment to free cash flow in 2024, and forecast better Ebitda. On the back of three profit downgrades, however, these predictions hold little weight. Downgrade to Sell. 

Last IC View: Hold, 101p, 25 May 2022