A large one-day drop in a share price always flags up a potential opportunity for me – after all it can only be either a fair reflection of an issue, or an overreaction. Unfortunately for bank note maker De La Rue (LSE: DLAR), yesterday’s 20% fall in its stock doesn’t quite seem the chance I would hope for.
Bad day, bad two years
Tuesday’s price drop came after its half-year results showed ever mounting piles of debt for the company, which puts pressure on the company in terms of some of its banking covenants. What’s more, De La Rue suspended its dividend, which though probably a sensible option, is never what investors want to see.
The news comes as the company already suffers from a bad year or two – profit warnings in October and May, as well as a Serious Fraud Office investigation in July, leaving its shares down about 70% for the past half-year alone.
The company has been making efforts to mount a turnaround, seeing a new chairman, CEO and financial director taking up positions in recent months. Chief executive Clive Vacher, who has only been in place for about seven weeks, is currently overseeing a strategic review to cut costs and boost cash flow.
By his own admittance however, these changes at the top have brought about “inconsistency in both quality and speed of execution” for its turnaround efforts, most notably in its currencies business.
Unfortunately for De La Rue, it is not just the past six months that have seen it suffer – troubles have been building for two years. The company took both a financial and PR hit in 2018 when it lost the contract to print British passports to a French firm. Matters were made worse when the Venezuelan central bank refused to pay De La rue what it owed them.
Old industry in a modern world
Unfortunately for De La Rue all signs suggest things may get worse yet. Its latest numbers show revenue in its currency division fell 30% for the half year, which the firm suggests was caused by “cyclical overspill demand” from central banks, but it may in fact be part of a growing trend.
The simple truth is the use of credit and debit cards, as well as bank payments and even wireless phone payments, is becoming far more widespread, while cash is being used less and less.
As with many other mainstay companies in old or dying industries, the use of paper money seems to be a business on the slide. With currency printing still representing De La Rue’s core business, it is hard to see how it could make up the shortfall through its security and counterfeit division (though it may eventually be able to do so).
It seems strange calling cash a dying business, but consider it like this — if you had to place a bet on how much paper cash will be used in 2025, would you bet on less than today, the same as today or more than today? With that in mind, a cash-printing firm is going to have a lot to overcome in the next few years.
