De La Rue plc (DLAR) Ordinary 44 152/175p
HL comment (27 May 2015)
- Dividends have been cut, as previously flagged, to 25p for the full year (2014: 42.3p)
- Revenue down 8% to £472.1m (2014: £513.3m)
- Profit before tax (underlying) £57.7m versus £77.3m in 2014
- Underlying earnings per share of 45.3p, down 25% on the 60.7p reported in 2014
- Year-end order book down 21% to £243m (2014: £307m)
- Planned cost savings to be largely reinvested into R&D and additional sales resources.
Currency Division - Banknote printing volumes were 5% higher at 6.5bn notes, but the volumes of banknote paper manufactured were 2% lower, at 9,400 tonnes. Revenues slipped 7% to £318m and profits fell 17% to £50.5m. Safeguard polymer notes are now in circulation in seven nations, with a good pipeline of opportunities. The divisional order book still declined by almost 25% to £150m.
Identity Systems - The large UK Passport contract performed well, but other expected opportunities are taking longer to materialise than expected. Profits almost halved to £11.1m on revenues that dipped 11% to £69m.
Security Products - A 29% fall in profits, to £7.5m on revenues 14% lower at £40m was led by volume declines for older products. New tax stamp schemes have not been adopted at the rate hoped for.
Cash Processing Solutions - The division returned to profit, making £0.4m (2014: loss of £4.2m), despite sales dipping 12% to £51m as restructuring efforts paid off.
Pension Fund - the deficit increased to £237m vs. £168m a year ago, under IAS 19. A formal triennial review is underway and the group is making additional payments of around £18m per annum in the meantime. The deficit is very sensitive to discount rates and a 25bp change will move the deficit by £56m in either direction.
Read more share research from Hargreaves Lansdown
New CEO, Martin Sutherland has characterised group businesses as falling into two groups:
"Optimise and Flex", where future growth opportunities are seen as modest and where the emphasis will be upon cost management and optimising manufacturing processes and equipment.
"Invest and Build" where growth opportunities are stronger and markets are more profitable.
The core Currency Print and Paper business falls largely into Optimise and Flex, as does Cash Processing Systems. De La Rue hope to find outsourcing partners to take on the production of marginal volumes of notes/paper, allowing their restructured plants to operate at peak efficiency.
Components, Identity and Security products are Invest and Build candidates, with Components including the Polymer banknotes. All these business, be they security components for banknotes, ID systems, or trademark protection devices are technology driven, with rewards for successful innovation.
De La Rue hope that execution of the Review will lead to a less volatile, higher quality Group with a more diverse customer base and a better mix of business, with higher growth and profit in time.
Notwithstanding the hoped-for benefits of the Strategic Review, in the near term, markets are difficult and the weakness of the euro against sterling has made continental rivals more price competitive. This is putting further pressure on group profitability. The Board will seek to maintain dividends at current levels.
De La Rue actually has a licence to print money, but only, it seems, for other people. The 2014/15 results are another depressing milestone on a journey toward an increasingly uncertain future.
De La Rue serves the developing markets first and foremost, and the slowdown here cannot help. The designation of a huge swathe of the core currency businesses as Optimise and Flex hardly encourages. News of a worsening competitive position versus European rivals is no tonic, either.
Cost cuts from the Strategic Review are to be largely reinvested into the business; growth will have to come from higher volumes. So a slump in the order book and news that ID systems and other vaunted growth prospects are underperforming means that it is jam tomorrow time.
Contactless payments are De La Rue-less payments. It will be some time before most developing nation citizens have bank cards to swipe, but when they do, De La Rue's markets could be impacted. Polymer notes are a good opportunity, but De La Rue must be able to get a price for them that reflects their inconvenient feature of lasting much longer than paper notes.
Analysts will likely trim their numbers after they have discussed the outlook with management. The company may have met analysts' (much reduced) expectations for profits this year, but they appear to be steering downwards for the new financial year.
The dividend yield, assuming a maintained dividend, and that might be rash, given the direction of travel, is 5%. The group trades close to its ten year low, in terms of the price to sales ratio, but the profitability of those sales, and their quantum are both slipping. This and that dividend yield could attract investors' attention, nor can we rule out Oberthur or other rivals taking another look. But in the meantime, profits and market shares are under pressure and products that were supposed to drive growth are not delivering. All that, plus the pension deficit make De La Rue a risky situation.
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