The day after the new chief executive of De La Rue unveiled his turnaround strategy for one of London’s oldest listed companies, the shares were back in the red. So much for the banknote printer’s rally — by a fifth — after the plans were announced alongside trading update on Tuesday. Last night the shares closed down 4½p, or 3.1 per cent, at 143p.
It was, perhaps, a salutary lesson Clive Vacher, 49, who was parachuted in as chief executive in October to rebuild investor confidence and the bombed-out share price. The former boss of Dynex Power is an industrials expert who has built a reputation for turnarounds, but here he is facing his most public, and therefore most fickle and unforgiving, job.
De La Rue, founded more than 200 years ago, operates in 20 locations worldwide and employs 2,700 people. The Basingstoke-based company has been restructuring since 2015, shifting away from manufacturing, as well as offloading its paper business and the core of its passport operations.
That first turnaround ran into a series of profit warnings, boardroom turmoil and an activist shareholder revolt. Indeed, De La Rue still faces huge uncertainty over its future, leading it to state at its half-year results in November that “there is a material uncertainty that casts significant doubt on the group’s ability to continue as a going concern”. Mr Vacher’s turnaround plan runs until the end of 2022-23 and was described by analysts at Investec, its house broker, as a “sensible evolution of existing strategies”. It centres on accelerating a cost-cutting drive and expanding De La Rue’s two remaining businesses: currency and authentication.
Its banknotes business accounts for almost two thirds of its £205.9 million adjusted revenues in the first half of the year. De La Rue is bullish about the prospects for this market, despite the shift towards cards and mobile payments. It argues that the world is still cash-based, with 84 per cent of consumer transactions using currency, and it plans to tap further into the trend towards polymer notes. Since 2013, 83 per cent of central banks that have issued banknotes on polymer globally have selected De La Rue, including the Bank of England and its new £20 note, released last week. Yet only 3 per cent of the world’s banknotes by volume have moved from paper to polymer. De La Rue is targeting “mid-teen adjusted operating profit margin” from 2020-21, driven by cost-cuts and investment in polymer notes.
Its smaller product authentication business accounted for 16 per cent of half-year adjusted revenue. Here De La Rue is looking to profit from countries adopting tobacco tax stamp schemes to comply with the World Health Organisation’s tobacco control framework.
The group cost-cutting drive is seeking annualised savings of £35 million from the second half of 2020-21, above an earlier £20 million target. It is looking to become more competitive in tendering for currency orders that previously it would have rejected. The cash costs will be about £17 million in 2020-21.
Crystal Amber, its biggest shareholder which agitated against the previous management, has welcomed the plans and has increased its holding. Yet several uncertainties call into question the ability to deliver the turnaround and will continue to weigh on the stock.
De La Rue is yet to recoup an £18 million debt owed by the Venezuelan central bank, although it is confident that this will be paid once US sanctions are lifted. Less clear is the outcome of a Serious Fraud Office investigation over suspected corruption in South Sudan and its future financing.
ADVICE Avoid
WHY Significant uncertainty remains for now over the turnaround and its financing
Capital & Counties Properties
Even the best destinations are not immune to the downturn in retail property values (Louisa Clarence-Smith writes). Covent Garden in central London has fallen in value by 1.4 per cent to £2.6 billion, Capital & Counties, its owner, said yesterday, adding that “the West End remains resilient; however, it is not unaffected by the well-documented challenges in the retail sector”. The estimated rental value of the estate has fallen by 0.1 per cent.
Capco is a very different investment proposition since it sold the majority of its Earls Court residential-led development holding for £425 million last year. Its pitch to investors now is that the reformed business, almost entirely made up of its Covent Garden estate, will have the ability to drive growth in net rental income, to operate under a much-reduced cost base and to access significant liquidity to capitalise on investment opportunities and deliver superior long-term total returns.
Retail property valuations have been under pressure as bricks-and-mortar players struggle to compete with online rivals, while paying high business rates and employment costs. Experience-led retail destinations remain popular, but landlords will need to prove that they can continue to offset pressure from a trend towards shorter leases and lower rents.
With its shares trading at a discount to net asset value of about 21 per cent — compared with 12 per cent at Shaftesbury, its nearest rival — Capco is good value for sector. It also has been tipped as a potential takeover target for an overseas investor looking for a “trophy” London holding. The Earls Court sale drove a 10 per cent fall in its reported net asset value of 293p per share for the year to the end of December. The company announced a £100 million share buyback and has cash and undrawn facilities of £895 million and a healthy loan-to-value ratio of 16 per cent before considering a deferred payment for Earls Court. It has proposed a full-year dividend of 1½p per share.
Future earnings growth will depend on driving value from Covent Garden and finding opportunities in a competitive market.
ADVICE Hold
WHY Test for management to boost earnings in challenging retail climate
