De La Rue: cash printer needs to do the same for its shareholders

Charles III became king of Great Britain and Northern Ireland at the weekend following the sad death of his mother. His likeness will in time replace hers on UK banknotes. Shares in currency printer De La Rue have risen sharply in anticipation. But it will take more than this to revive the fortunes of a business with a deep structural problem.

The royal image is found on 4.7bn British banknotes and on legal tender across the Commonwealth. New notes featuring Charles III will appear within months. But these will probably enter circulation as old notes wear out.

The run-up in the shares therefore seems misplaced.

The company’s market value is just £200mn, compared with £1bn 10 years ago. This reflects several failed turnround attempts. A profit warning in May signposted further trouble ahead. Inflation is pushing costs up and postponing profitability.

The efforts of chief executive Clive Vacher have borne fruit operationally. He has been streamlining a business already diminished by the loss of the contract to print UK passports and the sale of an identity division. He has cut the number of sites, but higher input prices and supply shortages have offset much of the benefit.

As previously, De La Rue hopes to benefit from higher-margin services and sales of banknote polymers. Banknotes may be losing ground as a medium of exchange but production volumes are still growing.

What investors really want to know is when this literal money-printing operation will spit out something for them. Having suspended the dividend in 2019 a return next year is possible. Free cash flow should turn positive again in the year starting next March to the tune of £19mn, according to consensus, equivalent to a 10 per cent yield.

However, De La Rue would need to pay regular dividends to regain its lost status as a UK mid-cap. It competes in an industry dominated by central bank printers willing to sell at cost price or below. That is an intractable difficulty, whoever features on its notes.