De La Rue Impacted by Low Banknote Demand

De La Rue has recently provided a trading update, which indicates both a small (mid-single digit percentage) drop in profitability below market expectations (of £30-33 million) for 2022/23 but an uncertain outlook for 2023/24, with a potentially sharp reduction in profits. The share price fell 20% on the news.

According to the company, the downturn in demand for banknotes, impacting both De La Rue and the wider industry is causing a significant degree of uncertainty in terms of the outlook for the current financial year, to March 2024. Demand has been at its lowest levels for over 20 years, resulting in a low order book going into the current year, albeit that there are encouraging signs that the market is recovering, with a significant number of new tenders actively underway.

However, it said, the timing of this recovery remains uncertain, and hence the guidance that full year adjusted operating profit for the 2023/24 financial year is likely to be in the low £20 million range. It continues to pro-actively manage its financials to adapt to the changing market conditions and is currently in discussions with its lending banks to seek an amendment to its banking covenants, reflecting the revised outlook and also increased funding costs resulting from higher interest rates.

There is, however, cause for optimism says De La Rue. Although it is reliant on banknote print, substrates and features, its Authentication division is performing well, with a growing number of long-term contracts. Its Sales are expected to exceed £100 million for the first time this year, driven by the existing order book, including the full year impact of GRS (government revenue solutions) programmes in the Gulf states and Europe, and a substantial increase in demand for the Australian passport programme, for which it will supply the polycarbonate data page until 2032.

As for the Currency division, the company says that, the current uncertainty notwithstanding, it is still profitable, has dealt with the legacy issues through its Turnaround Plan that has made it more resilient to downturns, has entered the current financial year with a large pipeline of potential orders, and has an enviable win rate, securing two thirds of the contracts for which it is pitching.

The Bank of England contract, active since 2003, has been extended by three years to 2028 and, as well as printing the new banknotes with the portrait of King Charles III, it is in pole position to secure orders from many other countries who include the monarch on their notes.

De La Rue has also progressed substantially with its ESG agenda and, for three years running, has been named in the top quartile of Europe’s Climate Leaders listing by the Financial Times / Statista.

De La Rue’s results for the full year ending March 2023 will be announced on 31 May.

Chairman resigns

De La Rue subsequently announced the resignation of its Chairman, Kevin Loosemore. His position was already under attack prior to the trading update, for the second time in less than six months when the so-called activitist investor Crystal Amber called for him to go. The first attempt, last December, failed when he received the backing of over 90% of shareholders in a special general meeting.

This time, however, he has conceded, in order to ‘draw a line under recent speculation surrounding the leadership of the company’. His departure takes effect 1 May and De La Rue has announced an accelerated recruitment process to appoint his successor.