For a company that prints banknotes, there is some irony in De La Rue (LSE: DLAR) shares trading for pennies. But after a 44% decline in the share price over the past year, the company indeed sells for less than a pound per share.
The company has some unique competitive advantages. So ought I to take advantage of the current share price to add it to my portfolio?
Changing world
De La Rue has had a strong business for several centuries printing banknotes for central banks across the globe. That remains an important source of revenue. But as the world shifts to a higher rate of digital payments, the firm has been broadening its horizons while drawing on its established expertise. For example, it produces authentication products like the duty stickers seen on alcohol and tobacco in many markets.
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This mix of businesses makes sense to my mind. But it has not been enough to stop revenues falling. In the first half they were down 8.3% compared to the same period in the prior year. Having a license to print money is not necessarily a license to print money!
The authentication division revenues grew 2.5% year on year while the small identity solutions division recorded double-digit percentage revenue growth. The problem for De La Rue is that the currency division accounts for the lion’s share of revenues. That division saw revenues decline 12.3%.
Should this sell for pennies?
De La Rue currently has a market capitalisation of around £128m. It had net debt at the interim stage of £87m, meaning it has an enterprise value of roughly £215m.
It has been consistently profitable in recent years. Even in its 2021 nadir, annual post-tax profits came in at £8.5m. Last year they were £22.9m.
For the full year the company expects adjusted operating profit of £30m to £33m. That is a different measure to unadjusted post-tax earnings, but it does underline that De La Rue continues to have strong profit potential despite its challenges.
To me, the current De La Rue share price makes it look cheap.
But I see some significant risks that might explain the price. Banknote demand may be in long-term structural decline, potentially hurting the economics of the De La Rue business badly. The company performance can be badly affected by the loss of a single contract, as we have seen in the past. The debt pile will also need to be paid down at some point, eating into profits.
In for a pound?
I considered buying De La Rue shares for pennies apiece in the first half of 2020. I decided not to – and they quadrupled in under a month! I could have been sitting pretty if I had decided to invest back then.
The declining price gives me another buying opportunity for less than a pound a pop. I still see a lot to like in the business. But I think the risks are too high for my liking. So I shall not be buying.
