De La Rue shares tumble on profit warning

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De La Rue shares fell by a third on Friday after the British banknote printer unveiled a third profit warning in two years and announced plans to cut its dividend, following tough competition in the commercial market from state printworks including Russia’s Gaznak.

The maker of sterling notes that also supplies currency paper to other printers has for some time been warning of a negative impact on earnings owing to overcapacity in that segment of the market.

But now, competition from state operators bidding to print notes for other countries, as well as aggressive pricing from commercial rivals, is forcing margins down further.

“All of that starts to breed competition in prices, in an already oversupplied market,” said Philip Rogerson, De La Rue chairman. “Nobody will be benefiting from this, other than the customer.”

Mr Rogerson, who has led the company since the departure in May of former chief executive Tim Cobbold, said the latest profit warning made for a “tricky start” for new boss Martin Sutherland. The former managing director at BAE Systems is to take over as chief executive in two weeks.

“What we’re saying now is not the result of problems that have emerged within the company,” said Mr Rogerson. “It’s the state of the market in which we’re operating . . . [which is] tough, to say the least.”

De La Rue’s shares were down 33 per cent at 508p on Friday afternoon, leaving them trading at levels not seen since November 2010, when a string of trading problems wiped almost £400m off its market capitalisation and prompted an opportunistic takeover approach from French rival Oberthur.

The UK company eventually saw off the 935p-a-share indicative offer after a three-month pursuit, but De La Rue’s recent woes have prompted renewed speculation about a potential takeover.

“Clearly De La Rue has had three profit warnings in two years. Any company that does that is vulnerable,” said Charles Pick, analyst at Numis.

De La Rue received a boost this month when it was named preferred bidder to continue printing sterling banknotes for the Bank of England for another 10 years, having held the contract since 2003.

But analysts speculated that this repeat contract – which now includes the new £5 and £10 plastic notes – had been awarded at a much lower margin than before.

In an update on its six months to September 27, the FTSE 250 company said trading conditions across the group had deteriorated. The interim dividend is expected to be 8.3p – 40 per cent lower than last year – and De La Rue said it would “reappraise” the full-year payout.

Analysts had been expecting operating profit of about £90m in the year to the end of March 2015. The consensus number has now been slashed by about £20m, to £68m.

Paul Jones, analyst at Panmure Gordon, said De La Rue was “the biggest rollercoaster you’ve ever looked at”.

“De La Rue remains one of the most cyclical beasts in the market, and under our coverage has seen more downgrades and upgrades than for any other stock – by a significant multiple,” he said.

De La Rue, which relies on the currency market for 70 per cent of its revenues, is often at the whim of central banks restocking with notes, which can have a big effect on the timing of orders.

It can also receive huge, unexpected orders in the event of global unrest. For instance, it won the contract to swiftly design and supply the first banknotes in post-Gaddafi Libya.

The company, a British bastion of banknote printing with a history stretching back more than two centuries, has for years worked on a tender process one analyst described as the “ambassadors’ gin-and-tonic circuit”. De La Rue has had a steady stream of contracts with former colonial countries.

But the tender process has become much more transparent of late, with bids from commercial operators, such as Giesecke & Devrient of Germany, being made public.

De La Rue is trying to reinvent itself in new areas of business. For instance, the company prints e-passports for clients including the UK government. But the company said on Friday that the move towards the biometric documents from machine-readable passports was happening more slowly than expected.

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