Shares in banknote printer De La Rue (DLAR) crash by as much as 26% to a 10-year low of 337p after the firm warns on current year profits and shows its CEO the door
The company says the ‘increasingly competitive’ banknote print market is creating ‘significant headwinds in the year ahead’, so while group revenues are expected to be broadly in line with last year, margins and operating profits will be ‘somewhat lower’.
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For the year to 30 March, revenues were up 12% to £516m, which was above market expectations, but operating profits were only up 6% to £60.1m compared with market estimates of over £62m.
Before today’s warning the consensus forecasts for this year, according to De La Rue’s website, were for revenues to hit roughly £519m and operating profits to reach £67m. The company is now guiding analysts to an operating profit of less than £60m.
WEAKNESS IN BANKNOTES
De La Rue is the world's largest designer and commercial printer of banknotes, and currency makes up around 80% of annual turnover. While cash is still the most popular payment mechanism around the world due to its anonymity and the low cost of use for consumers and retailers, demand for banknotes fluctuates so revenues can be irregular.
Last year was good for De La Rue’s currency business with 16% growth in revenues, but the surge in demand over the last couple of years has come to an end meaning there is now over-capacity in banknote printing which is causing prices to fall.
Meanwhile alternative payment systems like Paypal, Apple Pay and contactless card or mobile phone transactions continue to eat into the share of cash transactions in many countries.
For example, in 2012 over 95% of transactions in China were made in cash. By last year that percentage had almost completely reversed with over 85% of transactions made using mobile payment, where local firms WePay and AliPay dominate the market.
And in a recent Ipsos survey of Chinese consumers, almost three quarters said that they could get by for over a week with less than 100 Renminbi ($15) in cash. China may be an extreme example, but the bottom line is the world is going increasingly cashless.
PASSPORTS PLEASE
De La Rue’s ‘Identity Solutions’ business saw a big spike in demand for UK Passports at the end of last year, which helped offset lower volumes in its international ID business leaving revenues flat at £78m.
Ironically this came after the firm lost its contract to print UK passports, which would have generated £490m of revenues over the next 10 years. The government awarded the contract to Franco-Dutch rival Gemalto instead.
The ‘Product Authentication & Testing’ (PA&T) business, which runs digital tax stamp programmes on products like tobacco, also had more or less flat revenues of £39m.
While both businesses involve a high degree of technical sophistication and are relatively high-margin, neither is of sufficient scale to offset the drop in sales or margins in banknote printing.
ALL CHANGE
Therefore more restructuring is needed, and the company is hinting heavily at reducing headcount and capacity as it reorganises into two divisions to ‘optimise operations and provide future strategic options’.
It hopes this will lower costs by as much as £20m by the year to March 2022, although lower profitability in banknote printing is expected to reduce some of this benefit.
In a separate statement the company announced that chief executive Martin Sutherland, who has led the firm for the last five years and overseen the transformation from a manufacturing business which even owned its own paper supply to a technology-led business, is leaving by agreement with the board.
Sutherland will stay on until the board appoints a successor, which is something at least, but like the rest of the shareholder base he is nursing significant losses on his stock after today’s developments.
