I have been following banknote printer De La Rue (LSE: DLAR) for a while now, and I have to admit nothing I have seen so far inspires me with confidence in it as an investment. It was with some surprise then, that I read earlier this month that activist investment fund Crystal Amber had quietly doubled its stake in the firm, from 7% to 14%. I have to ask, why?
Throwing good money after bad?
The first thing I will note is that Crystal Amber has been a stockholder in De La Rue since 2017. Just as with individual investors, asset managers and hedge funds alike can succumb to the sometimes false belief that their investment will turn around, that they will get their money back, and maybe even make some money.
The De La Rue share price certainly offered a good opportunity for averaging down – the stock hit a low (at the time) of 133p in November after announcing a £12m loss and warning of “material uncertainty” about its future. In 2017, about the time Crystal was first investing in the company, De La Rue shares were worth about £6.20.
The problem with averaging down, of course, is that it only helps if the shares are eventually going to go higher. With De La Rue, unfortunately, I struggle to see any reason why this will be the case – at least for some time yet.
Richard Bernstein, CEO of Crystal Amber, has long been critical of the company’s management (most of whom have now left), and it is possible that this increased stake, along with the increased voting rights it brings, is his attempt to have more influence on the way De La Rue is governed.
Indeed, company insiders have said that De La Rue’s new management and Crystal have already held discussions about fixing the problems facing the company. The question for potential investors is, do we think they can actually do it?
Printing money
One fundamental issue I have always had with De La Rue is that its primary business of printing money is becoming a dying industry. Cash is being used less and less globally, while credit and debit cards (thanks in large part to online shopping) are becoming the primary way of spending for many people. The company will need to make the most of its other branches to offset this trend.
Unfortunately for De La Rue, its other businesses have also come under pressure, most notably with the loss of its contract to print post-Brexit British passports. It is making attempts to expand its authentication business arm, but to me this still seems far away from offsetting the losses and weakness of its currency unit.
The company has a lot to overcome, having had to take a £18m hit after the Venezuelan Central Bank effectively refused to pay its bill earlier this year, and with a Serious Fraud Office investigation into potential corruption in South Sudan.
It is just possible that the new CEO, “turnaround specialist” Clive Vacher, with the help and backing of Crystal Amber, will be able to fix De La Rue’s troubles and set it on the right path. I think, however, that there is probably further bad news to come before these changes take hold.
