British banknote and passport maker De La Rue (DLAR) results may show an 11% drop in adjusted operating profit to £62.8m but this was in line with its lowered guidance.

The company told the market last month that it had spent money on a failed bid to win the UK’s post-Brexit passport contract. Ironically, the £260m printing job went to a Franco-Dutch firm Gemalto, leading to a £4m write-off.

The company says a significant reduction in the ‘profitability of the paper business was the major factor causing the profit decline’. Now the company has sold this business it should be in better shape going forward as it plans to concentrate on its anti-counterfeiting business.

De La Rue  DLAR    Share Price   Shares Magazine

Investors seemed buoyed by the results as despite the well signalled hit to its profits, De La Rue’s share price gains 4% to 523p.


The sale of De La Rue’s paper business has allowed the company to strengthen its balance sheet, including reducing its pension deficit from £237m to £87.6m. Its debt position has shrunk meaningfully, from £120.9m to £49.9m in 2018.

This debt position beat Investec analyst Thomas Rands forecast of £54.8m and puts the company on a very manageable debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 0.6-times.

De La Rue now has significant firepower to engage in M&A to boost its technology offering. Its free cash flow of £97.5m was boosted by the proceeds of the sale of its paper business which came in at £60.3m.

De La Rue has had a turbulent time, its value dropping by around a quarter in the space of a year.

However, as Investec's Rands says ‘the transition to a less capital intensive, more technology led business continues. The sale of the paper business, with associated supply guarantees, was a major step-forward for the strategy.

‘Momentum continues to grow in new product launches with two new products released in May 2018 taking the total to six new products in the last two years. The new products launched in May are called Purelmage and Ignite’.

Using Investec’s forecasts, De La Rue trades on 12.5-times 2019’s earnings, paying a prospective dividend yield of 4.8%.

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Issue Date: 30 May 2018