The trend to move away from using cash is problematic for FTSE Small Cap stock De La Rue (LSE: DLAR). The company derives a big chunk of its revenue printing cash for countries around the world. And that line of business may be falling out of fashion. The long-term trend for using cash isn’t the friend of De La Rue.
Mixed fortunes for this small-cap stock
Today’s half-year results report for the period to 26 September reveals 73% of the company’s revenue came from its currency division. However, the process of making physical money produced a pre-tax loss of £5.7m. But a profitable operation in the area of Authentication contributed to offsetting that loss to produce an overall pre-tax gain of £2.5m.
And the full-year results released in June revealed a similar outcome. Indeed, the currency operation made a loss and other divisions saved the day to produce an overall profit for the company. All that effort and resource used to generate a big turnover in Currency only succeeded in worsening the profit outcome for De La Rue. It’s a dire situation for any business to find itself in.
Needless to say, the company is engaged in a turnaround strategy, which it announced early in the year. But it seems the troublesome currency division is holding back the profitable areas of the business. Nevertheless, De La Rue raised almost £93m net by issuing new shares in July. And the directors reckon the money strengthened the balance sheet and helps the company to move forward and deliver its turnaround plan.
Strong order books and positive cash generation
In today’s report, chief executive Clive Vacher said the two ongoing divisions of Authentication and Currency “are performing well.” The order books are “strong” and there have been “a number of important strategic wins in the first half of the year.” Meanwhile, the firm saw “positive” cash generation in H1.
And optimistic City analysts have pencilled in an uplift in earnings of just over 30% for the trading year to March 2022. So, with the share price near 169p, that puts the forward-looking earnings multiple at about 11. However, my guess is much of the increase in earnings will likely arise because of cost-cutting efforts and efficiency gains due to the turnaround strategy. And such gains may not be repeatable in years to come.
If the authentication business stood alone, I think it would be an attractive enterprise. But the combination with the currency business makes De La Rue unattractive to me. I’ll watch the turnaround process from the sidelines in this case.
But I think small-cap investing is still an attractive area of the stock market. One way of allocating part of my portfolio to the sector would be to invest in some of the several small-cap trackers or managed funds available today. Another way would be to keep researching shares until I find a company with more attractive prospects and a reasonable valuation.
