Tuesday 17 September 2019

Share Watch: De La Rue shows it's often easier to print money than to make it


Stock: PA
Stock: PA

John Lynch

There once was a time when life itself seemed to depend on what one wise man called "the frequent flow from hand to hand of cash". But this basic rule no longer applies. Sweden, for instance, has gone virtually cashless and the Stockholm central bank is thinking along the lines of an e-krona. Threats to cash are everywhere. Facebook recently announced it is planning a low-cost cryptocurrency in partnership with 27 other companies. If you and I find this puzzling, so too do a lot of central bankers, regulators and politicians, not to speak of banknote printers - especially our target company this week, the UK-based De La Rue.

De La Rue has been printing banknotes for the British crown as far back as 1860, and in the 1930s began printing notes for other countries. Today the company prints a third of worldwide banknotes and a lot of the time its clients are smaller countries which like to be protected from the security implications of printing their own currencies.

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A printer like De La Rue ships other risks too; currently it is coping with an £18m (€20m) debt from the Venezuelan central bank.

Banknote printing has turned into a commodity business and become difficult and uncertain. Overcapacity remains a problem. While some say the threat of a cashless society is overstated, De La Rue remains stubbornly defiant over the long-term role of cash and has been surprisingly slow to innovate.

Printing banknotes still accounts for 80pc of De La Rue's revenues and 60pc of its profits. The company is hoping to offset the volatile banknote business with technological diversification and plans for most of its profits to come from this source within the next five years. To date it has shown little form.

De La Rue also produces stamps, passports, travellers' cheques, driver licences and identity cards. The company is still reeling following its failure to win the UK contract to print post-Brexit passports, which was awarded to an EU rival. The decision triggered a storm of criticism from Brexiteers, but the UK Home Office stood firm.

Amidst these challenges, De La Rue shares headed south as the company was rocked by news that the UK Serious Fraud Office had launched an investigation into suspected corruption. The probe has focused on the company and associated persons in relation to its business in South Sudan. To compound these problems, the company also saw a shareholder rebellion over a pension deal for its outgoing CEO, Martin Sutherland.

While the company faces problems with fiery shareholders, it also has endured boardroom casualties in addition to a difficult business outlook for profits. Under pressure from an activist investor, Crystal Amber Fund, it saw the retirement of its chairman, senior independent director and CEO. Last week it named an ex-CEO, Kevin Loosemore, as its chairman.

Resignations of CEOs at De La Rue are not unusual. Eight years ago the incumbent was dumped following a screw-up on a banknote order. At the time the share price tumbled and the company had to fight off an opportunist bid from a French rival, Oberthur.

With banknote demand set to weaken this year and given the competitive environment, a standstill year is expected. This will not help its share price which has fallen from 900p five years ago to 210p today. Investors are not happy that its market value has more than halved and now stands at £218m. They are also miffed that debt has doubled in the past year. The group also faces a pension deficit with top-up payments set to increase in coming years. A dividend cut seems inevitable and the company once again could become a takeover target. Such an offer would be nowhere near Oberthur's bid of 935p a share.

Unless one is full of hope for generous takeover terms, De La Rue shares should be avoided.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any shares mentioned.

Irish Independent

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