If there is one company that really knows how to make money it is De La Rue (LSE: DLAR). The firm has been printing banknotes for centuries. However, when it comes to turning a profit, recent years have been tough for the firm.
De La Rue shares have lost over 90% of their value over the past five years and now trade for pennies.
Still, today’s final results from the company contain some reasons to be optimistic about the future. Could the current share price offer long-term investors a bargain?
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Changing landscape
With demand for banknotes falling in some markets, De La Rue’s business model has been struggling to catch up. The firm is trying to build its other businesses, such as security authentication, but for now at least banknote production remains central to the firm.
Revenue last year shrank 7%. That was driven by a 9% fall in the currency division’s revenue.
The company swung to a £30m pre-tax loss on its continuing operations, although a significant part of that was driven by exceptional non-cash charges.
Net debt rose 16% to £83m and is expected to be around £100m at the mid-year point. The company saw a net free cash outflow.
Bright spots
That might sound pretty bad, but it could have been worse.
The annual report did not contain a ‘material uncertainty’ statement about the viability of De La Rue as a going concern. That should help the firm when negotiating with lenders.
The company also struck an upbeat note on its order book, saying it has already contracted to fill ‘the significant majority’ of banknote production volume for the current financial year, which runs until the end of March.
De Le Rue said it expects full-year adjusted operating profit to be close to £20m.
Possible bargain
With the current market capitalisation of around £80m, that means De La Rue shares are trading for around four times the expected adjusted operating profit per share.
That sounds like a possible bargain, especially if the firm can continue to improve performance in coming years.
But I also see risks here that help explain why De La Rue shares still trade for pennies.
Adjusted operating profit is one thing, but the firm also has non-operating line items in its accounts, like investing and financing charges. With an expected £100m of net debt, they will be considerable. It may be that the company continues to burn cash for the foreseeable future.
I am also not convinced that the tide has turned following what its chief executive described as a ‘historically low demand period’ for the currency division. Although the firm sounds optimistic about the outlook for this crucial division, it could be that lower banknote demand is simply the new norm as some countries encourage consumers to use digital payment methods.
If things go well, De La Rue shares could turn out to be a great bargain at today’s price. Its expertise in an industry with few commercial rivals is a strong competitive advantage. But I still see considerable risks and will not be investing.
