Elevation Capital Management Limited presentation on De La Rue plc (LON:DLAR).
De La Rue: The World's Largest Commercial Banknote Printer
De La Rue PLC is the world’s largest commercial banknote printer. involved in the production of over 150 national currencies.
De La Rue: Multiple Business Lines - Two Reporting Segments
The lumpy nature of the currency printing business dictates the need for the Company to have multiple revenue streams outside its currency printing business. The Company has two reporting business segments:
- Currency Segment (67% Revenue)
- Production of printed banknotes. banknote paper and banknote security components
- Solutions Segment (33% Revenue)
- Cash Processing Solutions (15% Revenue)
Production of large banknote sorters and authentication machines
- Security Products (8% Revenue)
Production of security documents. including authentication labels, cheques. stamps etc.
- Identity Systems (10% Revenue)
Production of passports. ePassport. national ID and eID. driving licences etc.
De La Rue: Reasons For Share Price Decline
- Recent overcapacity in the banknote industry. caused by increased longevity of banknotes and state-owned suppliers entering the commercial market is creating a very challenging operating environment for commercial printers like De La Rue. Its share price has declined more than 56% in two years from £10.72 on 26/ 10/ 12 to £4.75 on 10/10/2014
- We noted how far the price had declined below a rejected 2011 takeover price of £9.35. and initiated research. We later initiated our position within the Elevation Capital Value Fund during February 2015. Our average cost is £5.59' per share
- Current share price" = £5.45 (Market Capitalisation = £551.2M)
De La Rue: Overcapacity Leads To Significant Margin Pressure
- The rosy industry outlook in FY2014 (significantly improved margins) in the currency printing business been replaced by fierce competition in FY2015. which caused margins to contract significantly
- The reported large discount offered by the Company to renew the Bank of England contract is one example of the result of overcapacity in the industry
- Investors are worried that this industry-wide overcapacity is putting pressure on margins on a longer term basis
De La Rue: Recent Underinvestment In R&D Rectified...
We visited De La Rue in June 2015 and raised questions with regard to the future growth opportunity and the Company’s diversification efforts. especially after observing the continued decline in revenue in the Solutions Segment since 2012. Management commented that:
- A significant underinvestment had occurred in R8rD over the last five years and this has been reflected in the Security Products and Identity Systems Revenue
- An important part of the ongoing investment and strategy for the business is to increase R8tD spending to rectify its position as a market leader in these segments. re-invigorate market share and in turn, earnings from these segments - they are also less competitive markets and have historically delivered higher margins than the paper segment of the business
See full slides below.