US Edition De La Rue
919½p+82½
Questor says HOLD
BANKNOTE printer De La Rue came out with a profit warning last month. Couple that with worrying signs about the printing market, contained in the detail of the statement, and the company’s acute sensitivity to changes in production volumes, and the outlook for investors looks very risky, despite the progress made on cost savings.
The banknote printer, which has been celebrating its 200th anniversary this year, increased profits by 19pc to £28.4m during the first half of the year. This was an impressive performance, given that fewer notes were printed – in the six months ended September, the company printed 2.6bn notes, down 10pc from a year ago, and 7pc fewer than two years ago.
Not only are volumes down, but prices are coming under pressure, too. “The current over-capacity in the banknote paper market has led to a more difficult pricing environment in the printed banknote market,” said chief executive Tim Cobbold.
The FTSE 250-listed money-printing group is acutely sensitive to small changes in pricing and volumes, due to its high operational leverage. De La Rue operates large industrial printing machinery with high fixed costs for a print run. Small increases in the volume demanded, or the number of orders, can easily push it above or below the break-even point of profitability.
Those order levels have fallen year-on-year. The company said its order book had risen to £232m, up £25m since the year-end. However, that is down by £16m from the same stage last year, when it stood at £248m.
The company has embarked on a major cost-cutting programme to maintain profitability. Mr Cobbold said that, after restructuring the business and reducing costs, he expected operating profits to reach £100m by March 2014. Progress is being made and that is clear from the results table.
The problem is that cost savings are not coming along quickly enough. The board expects operating profit for the year ended March 2014 to be about £90m. The costs savings are now coming up against a tougher banknote printing market.
Two other pertinent issues remain for De La Rue investors. The first is the potential loss of one of its contracts. The Bank of England has put all of its banknote printing contracts, worth some £1bn, out to tender. The contract was initially handed to De La Rue in 2003 and is due to begin under the new terms within 18 months.
The second is any financial fallout from when De La Rue lost a lucrative contract with the Reserve Bank of India, worth up to 25pc of its profits. The problems related to issues with a certain type of paper production at its factory in Overton, near Basingstoke.
The problems triggered the resignation of chief executive James Hussey and the subsequent fall in its share price laid it open to a 935p-a-share bid from Oberthur Technologies, which wanted De La Rue primarily for its passport printing business.
Investors in De La Rue have had a torrid three years. The shares have fallen as low as 550p following the Bank of India issue, but almost touched £11 last year as cost savings came through.
It is no surprise that the shares are trading only marginally below Oberthur’s revised offer, made almost three years ago, at 935p, as any further decline in the share price would probably encourage another tilt at the company.
Back then, Oberthur was interested in the lucrative passport and identity card printing business. On this set of results, it still has good reason to covet that part of the business, as it reported a 43pc increase in profits to £15.4m during the first six months.
The smart move for Oberthur would be to wait for the result of the Bank of England announcement.
That means the best bet for investors is to sit tight, with the shares trading on 14.2 times forecast earnings, and providing a forecast dividend yield of 5pc. Hold.