Former FTSE 250 firm De La Rue (LSE: DLAR) is best known as the company that prints UK passports and banknotes. But the company has lost the passport contract and its money-printing business faces tough competition and bad debts.
Chief executive Martin Sutherland is leaving, and the shares are down by 28% as I write.
It’s a dismal picture, but this company does have some unique capabilities and its services remain in demand. Is this a turnaround buy, or will De La Rue continue to print the wrong kind of news?
What’s gone wrong?
The company says that profits for the 2019/20 financial year are now expected to be “somewhat lower than the current year”. Such vague guidance is annoying, unless of course the board really has no idea how this year will turn out.
Problems reported today include an £18m charge for bad debt in Venezuela and “growing competitive pressure in the banknote print market”. This is expected to result in reduced volumes and lower profit margins over the coming year.
Shareholders will be relieved that the full-year dividend has been left unchanged at 25p per share, giving a 7.6% yield after today’s drop.
What happens next?
Departing boss Mr Sutherland has made some progress. But he’s also presided over the loss of the UK passport contract and failed to return the group to growth. He leaves with profits lower than they were in 2014/15 and set to fall again this year.
The firm now plans to refocus its operations into two core businesses, Currency and Authentication.
Currency means banknotes. The authentication business includes the shrinking passport business, but is increasingly focused on measures to help government and corporate customers protect against counterfeit goods and tax evasion on products such as tobacco.
Buy, sell or hold?
I’m finding it hard to put a number on what I feel DLAR shares might be worth.
The currency business is set to shrink this year to meet longer-term sustainable demand, while the profitability of the authentication division will take a big hit when the UK passport contract ends in 2020.
The risks are made worse by the firm’s £1bn pension scheme, which has a £77m deficit and will require annual payments of between £20m and £23m until at least 2028. That’s equivalent to one third of last year’s adjusted operating profit.
On balance, I’d say that the company’s technology and market share in currency should make it valuable. I could be tempted to buy at current levels, but only a small position.
A successful turnaround?
Recent results highlighted a 5.1% rise in like-for-like retail sales and a 6.1% rise in underlying pre-tax profits. More importantly, underlying free cash flow rose from £55.8m to £63.6m, providing good support for the dividend and reported earnings.
The shares are up by more than 55% from the record lows seen at the start of this year. Despite this, they still look fair value to me, on 13.5 times 2019 forecasts earnings and with a 4.1% dividend yield.
I’d rate PETS as a buy at current levels, but given the flat outlook for earnings this year, I wouldn’t be surprised if the stock retreated at some point this year. That could provide a better buying opportunity.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.