In the 2000s, De La Rue shares were flirting with £14, but they are now dicing with £1. It has been worse, though: less than two years ago, there were such concerns about the 201-year-old banknote printer that the shares tumbled to 37p and a £100 million placing was needed to bolster the balance sheet.
However, Clive Vacher, a former Rolls-Royce executive, has steadied the firm in the face of war, civil unrest, supply bottlenecks and inflation.
Yesterday, De La Rue announced £375.1 million in revenue for the year to March 26, against £397.4 million in 2020-21. Adjusted operating profit dropped from £38.1 million to £36.4 million, but the earlier figure included £7.5 million from the since-sold identity solutions arm, so there was a 19 per cent improvement in the two remaining businesses: banknote printing and authentication, which embraces tax stamps, brand verification and much else.
Banknotes were a rare beneficiary of Covid, as the pandemic prompted a spike in demand for hard cash worldwide, even though there was less to spend it on.
Key for De La Rue is maintaining fruitful relations with governments of all kinds, since its bread and butter is bidding for contracts to provide currency. However, it also has a persuasive entrée in its new polymer banknotes, which are far harder to counterfeit than the paper versions. As yet, polymer accounts for only 1 in 20 notes globally, so there is scope for future sales. Vacher promises more “game-changing” security features in the next two years.
Polymer also contains the seeds of future sales hurdles, for while it costs 70 per cent more than paper, it lasts two or three times as long. But that is a problem for the next generation of managers to wrestle with.
In the meantime, De La Rue is bewitching finance ministries with tax stamps and other devices to help keep revenues flowing. Arguably, the authentication arm has even more potential than polymer banknotes as it can, theoretically, be applied to a wide range of goods and services at a time when forgery is rife, particularly of global brands in pharmaceuticals and other high-value products.
Understandably, though, Vacher’s focus for now is getting the firm’s house in order — and debts, cashflow and pension contributions are all moving in the right direction after a period of upheaval. When he reaches the sunlit uplands of normal trading and more predictable cashflow, shareholders can expect dividends to resume. But not just yet.
Indeed, there is little reassurance about the immediate outlook. Not only is De La Rue affected by the Ukraine conflict, it has a Sri Lanka factory under threat from the riots there. In light of all that, Vacher is sticking his neck out no further than a “prudent best-estimate” of adjusted operating profit for the current year at about the same level as just reported. That is hardly inspiring.
Thomas Rands at Investec takes a jaundiced view of those projected flat profits, predicting a 13 per cent fall in earnings before interest, depreciation and amortisation (Ebitda). But even that would still leave the shares on a modest 9.5 times earnings.
Given the geopolitical risks, the stock market is not yet minded to give Vacher the benefit of the doubt. The shares fell from 156p to 111p after January’s announcement of a turnaround plan and trading update. They have bobbled along since then and yesterday they shed another 11.2p, or 10 per cent, to 99.8p.
However, there is plenty of potential in De La Rue. Cash is more popular than many credit card holders realise, and authentication is only going to grow as thieves move from robbing banks to imitating branded goods. The shares may not have hit bottom, but as the fog clears, the company could benefit.
ADVICE Buy
WHY A fundamentally sound business is being undervalued by the stock market
Marston’s
As any pub manager will testify, it is a bad idea to disappoint customers — and from a corporate point of view that includes investors. In the past few weeks, Marston’s has stripped back its restaurant offers, scrapped its two-for-one deals and raised the price of a pint by as much as 45p. And last summer’s hint of a slimline return to dividends has been replaced by a cautious promise “to keep potential future dividends under review”.
At the same time, the chief executive, Andrew Andrea, spoke enthusiastically yesterday about segmenting the 1,482 pubs into three categories, so that a £9 plate of fish and chips in its Community-grade eateries magically sells for £14 in the so-called Revere outlets.
When the country is struggling with fuel poverty and a cost-of-living crisis, that smacks of both desperation and a degree of unreality.
It is a misconception that, since its deal in 2020 with Carlsberg, the company is no longer involved in brewing. It is true that, operationally, it has handed responsibility for the breweries to the Carlsberg Marston’s Brewing Company — but it owns 40 per cent of that business. The last annual report put a carrying value of £277 million on that stake, which represents 75.5 per cent of the entire group’s £367 million stock market value. So it is very much still in the brewery game.
Last week, Marston’s reported revenue of £369.7 million, more than five times the Covid-hit £55.1 million that trickled in during the first half of year, turning a pre-tax loss of £105.5 million into a £25.6 million profit. More significantly, like-for-like sales were 97 per cent of 2019 levels, suggesting a return to pre-pandemic normality. But yesterday, Andrea said that despite footfall slowly rising, sales were no better than stable. That suggests a lower spend per visit.
The hospitality industry bore the brunt of the pandemic’s commercial impact, and now inflation is combining with the fluid trends on working from home to create yet more uncertainty. In that light, Marston’s shares are only for the brave. Better to stay on the sidelines until the risk-reward balance becomes clearer.
ADVICE Avoid
WHY Will continue to struggle under the cost-of-living crisis
