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De La Rue (DLAR) stock dives after profit warning

By David Burrows

10:03, 24 January 2022

De La Rue print works in UK
The group has also been affected by supply chain shortages in chips and other process raw materials - Photo: Alamy

De La Rue has been hit hard by pandemic and supply issues. In a trading statement today, the manufacturer of bank notes explained that the significant headwinds, primarily relating to the Covid-19 pandemic, have become more pronounced.

‘The Omicron and Delta variants have caused substantially increased employee absences in our manufacturing facilities globally, which will result in lower total operational output for the full year’, the statement said.

More recently, the group has also been affected by supply chain shortages in chips and other process raw materials and has experienced a degree of supply chain cost inflation.

As a result of these external factors, the company now expects adjusted operating profit for the full year to be broadly similar to last financial year, in the £36-40m range, significantly below market expectations of approximately £45-47m.

Stock price dives

The revision of full-year profit expectations was dramatically reflected in the company’s stock price – shortly after opening the stock price plummeted – down 29.88% to 105.88p.

Back in June 2017, the De La Rue stock price stood at 698p. Since that high, the trend has been, more or less, consistently downward. It hit a low of 40.75p in May 2020 in the middle of the first lockdown.   While today’s stock price is not close to this figure, it is massively below the 2017 valuation.

Whilst polymer-coated notes and security features may still be in demand, the actual necessity of bank notes in general has come far more into focus during the pandemic.

Whether people felt pressured into remote and cash-less shopping during Covid is open to debate - what is important is the shift itself.

One of the main stumbling blocks for those used to, and preferring cash transactions, was the unfamiliarity with other options – but that is radically changing as Anthony Drury, managing director UK at Zip explains. “Covid has accelerated things by about 10 years, with regards to money being a transmission process.

“Tap and go has gone crazy as people have literally not wanted to ‘handle cash’ due to the virus. Very quickly we saw the transaction limit raised so it can cover the cost of things like a full tank of fuel.”  

He adds: “However, I think the smart phone has and will be the main driver of no cash. We have progressed from cash in your wallet, to cards in your wallet to just your smart phone.”   

The older generation and those without bank accounts have been used to the cash economy and then Covid happens and they can no longer physically go and pick cash up as before.  In addition to this, as Drury explains is: “There are kids growing up now who never touch cash.” 

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Consumer protection

There are of course security and privacy issues with cashless options - digital currency and online purchasing is not immune to fraud and hacking.  

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However, technology continues to improve levels of consumer protection, Drury explains, which in turns provides increased reassurance. “If my contactless card is lost or stolen, the instant it is used elsewhere I get an alert on my phone. You also need to remember that contactless is huge now and banks are benefitting from this. Consumer reimbursement for any fraudulent use is not problematic and is pretty quick.”

In addition to tap-and-go cards and smart phones, we have also seen the huge growth of virtual currencies (or cryptocurrencies) such as Bitcoin. And while this is different to online purchases or tap and go transactions (where the currency is still sterling) – it does fundamentally change the dynamic of how currencies (and banks) work.    

Turnaround plan

The full impact of Covid was not a factor when De La Rue announced its Turnaround Plan in February 2020, and the pandemic has resulted in a 12-month delay to the turnaround plan results.

The plan was designed to help De La Rue Currency division to return to progressive margin growth, driven by ‘cost reductions, and investment in polymer and related features where there are attractive market growth opportunities’. (Bank notes are now frequently printed on polymer – a thin, flexible plastic – they are more durable and offer security benefits over paper notes).

Back in February 2020, De La Rue said demand for currency continued to grow worldwide and the company aimed to maintain its number one position in the commercial currency print marketplace.

De La Rue turnaround plan also targeted strong year-on-year growth in its authentication business during the three-year period of the Turnaround Plan, driven by project related, investment.

‘No change of direction’

The board today said it retained full confidence both in the Turnaround Plan and in its execution.

Clive Vacher, CEO of De La Rue said "Despite the macro challenges that are delaying aspects of the Turnaround Plan, De La Rue continues to increase adjusted operating profit in both divisions year on year, and the Plan anticipates this to continue going forward.

“While this trading update is disappointing, it should be seen as a delay to reaching our Turnaround Plan objectives, rather than indicating that a change of direction is required.

“The Company's leadership has worked hard to mitigate many of these external effects, with the cost reduction activities we have implemented since early 2020 having a significant impact in supporting our underlying performance while we navigate these external factors.

Vacher concluded: “The markets in which we operate, and our position in them, remain strong, and we continue to execute substantial investment for the future."

Read more: Gemini Trust looks to acquire more crypto assets

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