De La Rue recovery plan attracts bargain hunters

A turnaround plan for the troubled banknote maker has been well received, but will it work?

With De La Rue (LSE:DLAR) shares selling for loose change, bargain hunters sensed a potential opportunity today when the banknote printer revealed how it intends to revive its fortunes.

The strategy of turnaround specialist Clive Vacher, who only arrived as CEO in October, helped ease immediate market concerns about whether De La Rue can service its debt pile.

Vacher's initial areas of focus will be on accelerated cost savings, as well as the growth in polymer banknotes and further momentum in product authentication services. An update on longer-term financing options is likely with May's annual results, but in the meantime De La Rue reassured that it will operate within its banking covenants in this financial year.

Shares jumped by almost a fifth, taking the stock back up to 147p from the multi-year low of just over £1 seen last Thursday. That was also the day that the Bank of England launched its new £20 polymer note, having been designed and manufactured by De La Rue.

A new polymer £50 note is due to follow in 2021, by which time the company's long-suffering investors will hope to have seen a similar kind of monetary growth in the share price. 

Source: TradingView Past performance is not a guide to future performance

De La Rue had been changing hands for more than a fiver as recently as August 2018, only to be laid low by over-capacity in the currency printing industry and by this year's planned conclusion of its UK passport contract. The dividend was sacrificed in November amid a jump in the company's debt pile to £170 million by the end of September.

Investec Securities analysts were encouraged by the update, particularly as the company also revealed that 70% of its 2021 manufacturing capacity was covered by secure contracts.

They reiterated their “buy” recommendation and 155p price target, adding that the three elements of Vacher's turnaround were “sensible evolutions of existing strategies”. 

Investec said:

“Assuming successful debt facility refinancing, we see significant upside potential for equity shareholders as the strategy is delivered.”

The cornerstone of the company's strategy will be to support the transition from paper to polymer notes, which are more durable, cleaner, securer and greener. 

The company pointed out today that only 3% of the world's banknotes by volume and 12% by denomination had moved to polymer. De La Rue leads the way in this area, having been chosen by 83% of those issuing authorities to have issued banknotes on polymer since 2013. The Bank of England's new £20 was the 42nd on the company's Safeguard polymer substrate.

This technology should help offset concerns about the trend towards a cashless society, even if De La Rue insists demand for cash remains strong. On its website, the company points out that cash still accounts for 8.5 out of every 10 payment transactions and that over a third of the world's adult population has no access to any other method of finance.

Recent weaker demand from governments and central banks, however, has still led to over-capacity. The resulting lower margins and a weaker pipeline of orders meant De La Rue's currency division recorded a loss of £12.5 million in November's interim results.

De La Rue hopes to offset this by more closely aligning bank note capacity with longer-term demand, with an existing three-year cost reduction programme now set to deliver savings of £35 million by 2021/22 rather than the £20 million previously outlined.

The company is also looking to build on the success of its product authentication division, which is expected to achieve revenues of £100 million by 2021/22 alongside strong operating margins.

It expects significant growth for several years as more countries adopt tobacco tax stamp schemes to comply with the World Health Organisation's Framework Convention on Tobacco Control. De La Rue is already in discussion with a number of countries regarding the roll-out of tobacco and drinks tax stamp schemes.