Money Printer Posts Profits

Banknote printer and electronic payment company De La Rue has posted an increase in revenues and profit as analysts say the company has "literally printed money"

Brett Horn 29 May, 2014 | 11:04AM
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Currency printer De La Rue (DLAR) finished its fiscal year on a strong note. Revenue for the year increased 6%. The growth was concentrated in the firm's currency segment, which was up 15% year over year due in part to relatively strong overspill orders from state-run mills and a shift toward higher-priced business.

However, the company is still seeing some pricing pressure from capacity added to the industry, and management noted that pricing declined on like-for-like basis. On the positive side, management thinks this pricing issue has stabilized and should roll off once growth in industry volume absorbs the capacity. Revenue in the solutions segment fell 5% year over year because of the roll-off of some one-time business in the past year and weakness in the cash processing business, which recorded a small operating loss as a result of lower volume. Management expects to return this line to break-even this year, but we question whether the company should look to move away from this business, as it has never been a material source of profitability.

Operating margins excluding one-time charges were 17.6%, compared with 13.1% last year. The improvement is mainly the result of the conclusion of the cost-reduction plan the company put in place following its production issues in fiscal 2011. While operating profit results fell a bit short of the company's initial guidance for fiscal 2014, it is notable that De La Rue has achieved £40 million of cost improvements over the past few years, an amount that equals 8% of sales. We will maintain our fair value estimate and moat rating.

The company provided only limited comments on its search for a new CEO, saying it has identified a short list of candidates and is in the process of evaluating them. With De La Rue back on a solid footing operationally and having gone through multiple CEO changes in recent years, we don't believe a major shakeup is in order. We would expect the new CEO to largely continue the path the company is currently following. As such, we think promoting an internal candidate might be the best option, especially considering the unique nature of the business and the difficulty in finding an external candidate with industry experience.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
De La Rue PLC98.00 GBX0.82

About Author

Brett Horn  Brett Horn is an associate director in the equity research department.

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