De La Rue has bailed on plans for a dividend this year and warned there is “significant doubt” on its ability to continue to operate, sending shares plummeting.
“We have concluded there is a material uncertainty that casts significant doubt on the Group’s ability to continue as a going concern,” it said today as it fell to a £9m loss.
Its share price plunged 20.6 per cent to 139.2p, a 19-year record low for the firm.
The banknote printer has announced a review of its entire business in a bid to slash costs, amid competitive pressure on its banknote printing arm from digital payments.
But net debt has soared while the group warned it has become overly reliant on banknote printing contracts, leading it to warn: “The risk that the group is not able to generate the necessary cost savings to enable a significant contract to deliver required profitability levels and cashflow risk associated with the unwind of the working capital build from H1.”
De La Rue paid no interim dividend as it sank to a £9.2m loss in the six months to the end of September. That compares to a £10.1m profit this time last year.
Revenue also slumped almost 10 per cent to £232.3m and investors made a loss per share of 10.7p, compared to earnings per share of 5.1p a year ago.
Net debt also skyrocketed from £107.5m in its 2018 half-year to £170.7m this time around, owing to last year’s final dividend payment, pension funding, and “adverse working capital movement”.
Why it’s interesting
De La Rue flagged “a period of significant management change and instability” over its last six months and said it would suspend future dividend payments in an attempt to keep a lid on its net debt.
Its chairman, former chief executive and senior independent director have left, along with most of the executive team jumping ship.
“This has led to inconsistency in both quality and speed of execution,” new CEO Clive Vacher said. “The new board is working to stabilise the management team, which we believe will take some time.”
De La Rue flagged the most significant of various “plausible” downside scenarios as the risk and timing of revenue recognition for contracts it is delivering, as well as the possibility it will not find adequate cost savings.
If more than one of these scenarios occurred at the same time, the company could breach its net debt ratio, it warned.
De La Rue had warned on profits back in October, but the scrapping of its dividend will be a new blow to investors today.
It replaced its chairman after the firm failed to win a government contract to print Britain’s post-Brexit blue passports, and its CEO resigned in May after an 80 per cent plunge in profit.
Meanwhile the company is facing a Serious Fraud Office probe into suspected corruption in South Sudan.
Vacher said he has identified “urgent actions” required to stabilise the company, and is conducting a review to slash costs as it looks to grow its security market presence.
“De La Rue is teetering on the brink,” warned Markets.com’s chief market analyst, Neil Wilson.
“Far from drawing a line under the previous performance before the arrival of Vacher and [new chairman Kevin] Loosemore, the profits warning in October – the second this year – was only the meat in the rather unsavoury sandwich.”
“The company is on the edge here. There has been trouble in Venezuela and the SFO investigation remains ongoing – but by far the biggest blow and the source of the company’s collapse in market capitalization was losing the contract to make UK passports,” Wilson added.
“I don’t buy the argument that printing banknotes in a cashless world makes them structurally irrelevant – cash in circulation is growing all the time. The need for more secure notes that De La Rue makes is becoming more important, not less. Bad management and decisions seems to be the main reason for the malaise.”
Unite called it “very worrying news”, and aired concerns about 250 members at De La Rue’s Gateshead base in today and we are seeking urgent clarification from the company about the future.
“The employment security of our more than 250 members at Gateshead, near Newcastle, and 150 members at the banknote printing business at Debden in Essex.
“The potentially precarious future of De La Rue, a major UK manufacturing company, should be ringing alarm bells across government,” national officer Louisa Bull said.
“We have previously criticised the government’s short-sighted and blinkered decision to award the printing of post-Brexit UK passports, worth £490m, to French-Dutch firm Gemalto as it seriously undermined the financial viability of the Gateshead operation.”
AJ Bell investment director Russ Mould questioned whether De La Rue can continue without rethinking its business model in a world going cashless.
“It is drowning in debt and has this year seen most of the executive team leave or resign, causing further instability in the business,” he said.
“One has to wonder just how long De La Rue can survive without a radical change to its business model.”
“We might have simply reached the point where De La Rue is best positioned as part of a bigger company rather than as a standalone entity,” Mould added.
De La Rue’s share price has now tanked 80 per cent since its October 2017 valuation of 700p per share.
What De La Rue said
Chief executive Clive Vacher said:
We have seen significant changes since the start of the year in the market for currency, including pricing pressure as a result of reduced overspill demand. This has had a material impact on volumes and profitability in H1 2019/20 and it will also take time for the currency market to normalise.
Our authentication business continues to show good growth and provides some degree of balance to the currency headwinds, while demand for polymer substrate is also exceeding our expectations.
In response, we are reviewing our cost base and will make the structural changes that will further strengthen our competitiveness in a challenging market. We continue to focus on building momentum in the higher-margin security feature market and continue to innovate to improve our position in this fast-growing area.
Between now and the end of calendar Q1 2020, we will complete a full review of the business and design a comprehensive turnaround plan for the company. In the meantime, we have already identified and started to implement the urgent actions needed to stabilise the business and allow us to complete the review. With strong emphasis on cost control and cash management, coupled with a focus on innovation and reversing the revenue decline, we will become a leaner, more efficient company and drive shareholder value.