Banknote printer De La Rue faces uphill struggle after shock profit warning

26th September 2014


Shares analysts and brokers have reacted badly to the surprise profit warning from banknote printer and passport manufacturer De Le Rue (DLAR) this morning.

Shares plunged 26% on news that profits for this year are expected to be £20 million lower than 2013/14 as market conditions have ‘deteriorated’. The company said it was struggling against a squeeze on margins for its printing services and slower than expected growth in new business.

Analysts are particularly worried about the banknote printing side of the business as despite signing a deal with the government for another 10 years the value of the deal is believed to be lower than expected.

Mike van Dulken, head of research at Accendo Markets, said investors will be ‘mightily unimpressed’ with the ‘stonking profits warning’.

‘While the statement [from De La Rue] suggests currency division volumes holding up, pricing is the issue which is going to hurt margins very hard with costs more difficult to cut. And the situation doesn’t look much better in the other divisions,’ said van Dulken.

‘The news just adds fuel to the fire of an already one-year downtrend…And that attractive 5% dividend yield? That’s a goner, with management quite rightly intending to reassess the full year element having already announced the interim will be cut by 40%.’

Numis analyst Charles Pick downgraded the stock from ‘add’ to ‘hold’ with a target price of 540p, describing the warning as ‘a grim one’.

‘The dividend – held through the tough times of the past – is now to be cut,’ he said. ‘Odd that nothing was said on trading when the Bank of England contract renewal was announced on 8 September but tender pricing issues for currency appear to have arisen only in recent weeks.’

The stock was also downgraded by Investec analyst Thomas Rands, who moved from a ‘buy’ to ‘hold’ recommendation and lowered his target price from 915p to 600p. He said the profit warning was proof of ‘further deterioration in banknote print and pricing’.

‘In the last 18 months, De La Rue has experienced deteriorating pricing across currency, given increased market supply, with particular pressure seen in banknote printing in recent months,’ he said.

‘At the AGM in July, the group was assuming that pricing would hold at prevailing levels. However, recent tenders have confirmed a further deterioration despite volumes holding up – this is also impacting outer years.’


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