Given the small market-cap (sub £100m), penny shares typically have higher levels of volatility than large-cap alternatives. Yet the 46% jump in the De La Rue (LSE:DLAR) share price last week was still notable even by penny stock standards!
It might still be down 39% over the past year, but has there been a change in the tide for the bank note printer?
Results not as bad as expected
The main reason for the jump last week was the release of the full-year results. The financial year for De La Rue runs March-March. On the face of it, some investors might be puzzled as to why the results were taken as a positive. After all, the company went from a profit before tax last year of £24.2m to a loss this year of £29.6m. Revenue dropped by 6.8% on the previous year.
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Yet for those that have been following the stock for a while, these results actually weren’t as bad as they could have been. The business has provided several downbeat trading updates over the past year. The half-year results already posted a loss. As a result, the share price had materially fallen since early 2022 as investors factored in the likely disappointing full-year results.
With all of that in mind, one element of the rally last week was simply the fact that results weren’t as terrible as they could have been.
The outlook is more positive
Another factor that helped buoy the stock was some of the comments from the CEO. He said that “we have witnessed encouraging signs of recovery with strong bid activity, a positive win rate, and
the significant majority of FY24 banknote print volume already contracted.”
This could mean that over the course of the next year, the financial performance could improve. Since the stock market is forward looking, people buy a stock based on how it could perform in the coming years. If a new investor was analysing De La Rue right now, the past is done and it’s all about how the business recovers from here.
There’s a caveat with focusing on the future though. Financials might improve, but I do note that net debt has been increasing and could continue to do so. It now stands at £83.1m (up 16.8% versus last year). The problem with high debt is that the interest expenses on it need to be paid regularly and can negatively impact cash flow.
Long-term viability?
When it comes to De La Rue, I’ve always been a little sceptical about investing over the years. We’re continuing to move to a cashless society, especially after the pandemic. Granted, it does have other divisions aside from the printing, including authentication. This likely has legs for the future, but I just don’t see how this business will ever get back to the glory days of a decade back when the stock was nearly at 1,000p!
