Since losing out on the contract to produce the UK's post-Brexit passports last year, De La Rue (DLAR) has struggled to convince shareholders it can redeem itself. News of an £18.1m exceptional charge for uncollected balances from the Venezuelan Central Bank highlighted the group's failure to diversify away from currency printing, with FY2019 earnings falling substantially short of consensus market expectations. What's more, management expects flat group revenue and operating profit to be “somewhat lower” this year. It comes as little surprise that chief executive Martin Sutherland is stepping down.
A five-year transformation plan launched in 2015 targeted a more balanced portfolio and transition towards a technology-focused product and services provider. Four years in, almost 80 per cent of revenue is still derived from the currency division.
Excluding the papermaking business (which was divested in March last year), higher volumes in banknote printing boosted adjusted operating profit in the currency business by 3 per cent to £41.7m. But more complex, lower-margin jobs and competitive pressures squeezed the adjusted operating margin by 1.4 percentage points to 10.4 per cent. With fluctuating overspill demand and irregular client buying patterns, the currency market remains unpredictable.
Admittedly, the total order book increased by a fifth to £554m, driven by demand for product authentication and traceability (PA&T). A five-year contract with HMRC to implement a track and trace system for tobacco products sold in the UK marks De La Rue’s first digital-only contract. The group believes momentum in these government revenue solutions and counterfeit brand protection will double PA&T revenue over the next three years.
However, as the current UK passport contract comes to an end next year, the full impact of the group’s failed renewal bid will become clearer. The identity solutions division is already weakened, with lower international volumes depressing revenue by 4 per cent.
Bloomberg consensus forecasts indicate adjusted pre-tax profit of £54.4m and EPS of 43.2p in 2020, falling to 52.5m and 40.9p in 2021.
| DE LA RUE (DLAR) | ||||
| ORD PRICE: | 333.5p | MARKET VALUE: | £346m | |
| TOUCH: | 332.5-333.5p | 12-MONTH HIGH: | 567p | LOW: 331p |
| DIVIDEND YIELD: | 7.5% | PE RATIO: | 18 | |
| NET ASSET VALUE: | * | NET DEBT: | £108m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 423 | 40.6 | 31.8 | 25 |
| 2016 | 455 | 54.9 | 46.8 | 25 |
| 2017 | 462 | 58.2 | 47.2 | 25 |
| 2018 | 494 | 114 | 93.7 | 25 |
| 2019 | 565 | 25.5 | 18.8 | 25 |
| % change | +14 | -78 | - | - |
| Ex-div: | 4 Jul | |||
| Payment: | 2 Aug | |||
| *Negative shareholders' equity | ||||
