De La Rue warns on profits as banknote demand slides

Banknote printer De La Rue warned on profits on Wednesday and said it has begun talks with its lenders as demand for banknotes has fallen to its lowest level in more than 20 years.

In an update for the year to 25 March, the company said it now expects full-year adjusted operating profits to be a mid-single digit percentage below market expectations. Meanwhile, full-year adjusted operating profit for FY24 is set to be in the low £20m range.

De La Rue said the downturn in currency is causing "a significant degree of uncertainty" in terms of outlook for FY24.

"The demand for banknotes has been at the lowest levels for over 20 years, resulting in a low order book going into FY24m," it said. "However there are encouraging signs that the market is recovering, with a significant number of new tenders actively underway but the timing of this recovery remains uncertain."

The company expects revenue in the authentication division to exceed £100m for the first time in FY24, driven by the existing order book, including the full-year impact of the Qatar, Bahrain and Oman GRS programmes, and a substantial increase in demand from the Australian passport programme. However, this progress will be somewhat offset by ongoing lower global PC sales.

The group also said that it’s in talks with lenders about seeking an amendment to its banking covenants. This reflects the revised outlook and the increase in its funding costs due to higher Bank of England base rates, it said.

At 1350 BST, the shares were down 23% at 38.60p.

Victoria Scholar, head of investment at Interactive Investor, said: "Activist investor Crystal Amber Funds recently said the group’s turnaround plan announced three years ago is failing ‘by every measure’ and the company is ‘failing to control’ various fees paid out. The activist has also been trying to remove Kev Loosemore as Chairman but he survived a vote in December.

"In recent years, De La Rue has struggled with the major loss of its British passport contract after Brexit, increased costs, supply chain woes, and a structural decline in demand for physical cash amid the rise of contactless payments and digital banking.

"Shares in De La Rue have plunged by over 30% today, bringing its one-year loss to around 68% and its five-year share price decline to more than 92%. Drastic change is needed in order to convince shareholders of a rosier outlook."

Numis put its rating on the shares under review pending the outcome of De La Rue's discussions with lenders.

"For FY23E management expects EBITA to be mid-single digit percentage below prior expectations, so we cut our FY23E EBITA by 6% to £28.2m and EPS declines by 15% to 6.8p," it said.

"Reflecting an even weaker demand backdrop in Currency in FY24E we lower our revenue by 8% to £315m, and our FY24E EBITA reduces by 44% to £22.5m consistent with management guidance for low-£20sm EBITA in FY24E, albeit noting considerable uncertainty around the outlook. Our FY24E profit before tax reduces by 73% to £7.5m and earnings per share by 81% to 2.0p. For FY25E we reduce EBITA by 41%."