Numis cuts De La Rue to 'hold' from 'add'

De La Rue’s shares fell on Wednesday after Numis cut its rating on the stock to ‘hold’ from ‘add but raised its target price to 580p from 563p.

The banknote printer last week reported its full year financial statement, which included two sets of results before and after the disposal of the Cash Processing Solutions (CPS) business on 22 May.

De La Rue had announced it sold CPS to Privet Capital for £3.6m the day before the full year results were published on Tuesday.

Before the disposal underlying pre-tax profit for the year to 26 March 2016 fell 13% to £50.5m and underlying operating profit dropped 10% to £62.5m due to the loss of £7.9m in CPS. Revenues rose 3% to £488.2m

On a continuing operations basis, group revenue was up 7% to £454.5m, underlying operating profit increased by 2% to £70.4m and underlying profit before tax was up 2% to £58.5m.

Chief executive Martin Sutherland said the company had made good progress on its five-year strategic plan to transform into the business into a technology-led security product and service product.

“We have reorganised the business structure, increased investment in product development and new technologies, and successfully completed a manufacturing footprint review,” he said.

The manufacturing footprint review concluded that the company could achieve more than £13m of annual savings from fiscal year 2018-19 by reducing the number of print lines and consolidating banknote production into four centres. The group said it will reduce banknote print production capacity from eight billion to six billion notes a year, matching current and long term average market demand.

“Some rare good news here of late with the favourable 13 April update and the CEO delivering in terms of his promise if necessary to sell/close CPS,” said Numis analyst Charles Pick.

“We also like the good start to the new strategy execution. However, there are negatives too: pre-tax profit could be -16.9% this full year before rebounding as cost savings from the manufacturing footprint review mount.”

Pick said reasons for caution in this current fiscal year include: the boost to last year’s fourth quarter results from atypically long production runs for banknotes with low wastage rates; the high margin security features contract that ended last December; and the possibility that earnings before interest and tax at Identity Solutions could be lower year-on-year.

“It is also probable that net debt will now trend higher, given extra capex and other costs for the manufacturing footprint review. This said, the CEO is a man with a definite plan and a strategy that looks likely to revitalise De La Rue, whilst by full year 2018/19 pre-tax profit ought to considerably surpass the 2015/16 outturn and upgraded free cash flow should enable some pay down then of net debt.”

Shares were down 3.12% to 542.50p at 1321 BST.