Interactive Investor

Insider: a small-cap turnaround and buying at a 70% discount

3rd July 2023 08:41

by Graeme Evans from interactive investor

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After a spectacular decline, this company’s recovery has the backing of its chairman, while a FTSE 250 firm has been snapped up on the cheap.

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The bounce for De La Rue (LSE:DLAR) shares continued into the weekend after the banknote printer’s new chairman spent £86,000 in support of turnaround prospects.

The disclosure of Clive Whiley’s investment at 43p added to momentum as the former FTSE 100 stock finished the week at 48p, having jumped 21% after Thursday’s annual results.

With “encouraging signs of recovery” in its main currency division, De La Rue broke a run of profits warnings by issuing unchanged guidance for the current financial year.

It added there was no longer material uncertainty about its ability to continue as a going concern, having renegotiated terms with lenders that have included a relaxation of covenants. It has also deferred planned pension deficit contributions due this year.

Numis Securities reinstated an “add” recommendation and said the business was now better placed to benefit from improving market conditions when they arrive.

However, there remains a long way to go for a company whose shares were trading above 400p in 2018 and 100p as recently as November.

Major shareholder Crystal Amber has been outspoken in its criticism, having previously supported the company’s rights issue in July 2020 at 110p. In particular, the activist investor argued that chief executive Clive Vacher had failed to communicate a strategy for growth since taking on the turnaround mission in 2019.

In last week’s 2022/23 results, revenues fell 6.8% to £349.7 million and adjusted operating profit declined by 23.6% to £27.8 million as central banks used banknote stocks built up during the Covid pandemic.

Economic conditions and the devaluation of currencies in some core markets were also a factor in currency revenues falling 9% to £254.6 million.

Despite the low levels of demand across the industry, the division made an adjusted operating profit of £13.6 million as De La Rue kept a pledge made in 2020 to break the historical cycle of losses in times of market lows.

De La Rue believes there are now signs that the market is recovering, with the substantial majority of 2024 banknote print orders already awarded.

These include recent wins, especially in Africa, the Middle East and Asia, that have been received since the end of the 2023 financial year.

The ID security and tax stamps division, meanwhile, is on track to exceed £100 million in revenues for 2024, up from £91.7 million as it benefits from the ramp up of a contract to supply ID data pages for the new Australian passport.

Whiley became chair in May, adding to his current role at Mothercare and following on from his previous turnaround efforts at funerals business Dignity.

He said: “My background gives me unique experience in managing companies through existential crises and it is my conviction that the fundamentals of De La Rue’s business remain sound.”

Are these shares ready to erupt?

Shares in FTSE 250-listed Molten Ventures (LSE:GROW) have been bought by its top two directors at a near 70% discount to the tech investor’s last disclosed net asset value per share.

The £50,000 purchases by chair Grahame Cook and chief executive Martin Davis took place with the stock back where it was in October having fallen 30% so far this year.

In recent annual results, the company reported its first decline in portfolio value since its IPO seven years ago and a drop in net asset value to 780p from 937p a share the year before

The former Draper Esprit business has shareholdings in 70 companies, 17 of which are core holdings and account for 62% of the £1.37 billion portfolio value. They include digital coaching platform CoachHub and machine intelligence business Graphcore.

After a difficult year for the technology industry, Davis told investors last month he is cautiously optimistic for the year ahead as markets stabilise and, in places, recover.

He added: “We believe that Europe has an ever-increasing role to play in the responsible advancement of AI – a fact that is apparent when you look at the developments that are occurring within our own portfolio companies.”

Davis bought shares at prices between 227p and 231p, with Cook doing so at 234.7p. Their investments are in profit as the stock revived during the week to close on Friday at 267p.

However, Peel Hunt believes there’s substantial upside based on its new price target of 543p.

The broker said: “There have been some big names that have had write-downs but private tech is about taking bets. Arguably, with the exponential rise in AI/GenAI over the last 12 months, the company was right to bet on Graphcore.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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