The board of De La Rue PLC (LON:DLAR) has warned of a “material uncertainty” over its ability to continue as a going concern as deteriorating trading conditions cast doubts over its banking arrangements.
Just weeks after its second profit warning of the year, the security printing company, which prints all the Bank of England's banknotes, swung to a half-year loss and suspended its dividend in order to manage net debt levels, warning that it could be in danger of breaching its banking covenants.
Despite growing revenues from other parts of the business, its currency division saw sales fall 30% in the first half of the year amid a decline in volumes and average prices because of reduced demand for overspill printing of banknotes.
The poor performance of this division led to adjusted operating profits crashing 87% to £2.2mln and the swing to a £9.2mln loss before tax from a £10.1mln profit a year earlier.
Net debt rose to £170.7mln from £107.5mln six months earlier.
Chief executive Clive Vacher, the turnaround expert appointed after the chairman, the previous CEO, senior independent director and most of the executive team left or resigned in the period, said this “unprecedented period of change” had led to “inconsistency in both quality and speed of execution”.
He said significant changes in the market for the currency division, including pricing pressure, “has had a material impact on volumes and profitability... and it will also take time for the currency market to normalise”.
Current management forecasts indicate that the group can continue to operate within its banking covenant ratio, which is for net debt to be no more than three times underlying profits (EBITDA).
But a series of “plausible downside scenarios” have been suggested, including performance risk and timing of revenue recognition on certain jobs, the inability to generate necessary cost savings, a further deterioration in trading conditions, additional costs from contingent liabilities and areas identified for growth generating disappointing levels of margin.
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Given the “more binary nature” of some of these downside scenarios, management acknowledged that a combination could result in the group breaching its net debt/EBITDA ratio.
Vacher said he was reviewing the cost base and “will make the structural changes that will further strengthen our competitiveness in a challenging market”, while also continuing to focus on the higher-margin and fast-growing security feature market.
Shares at 19-year low
De La Rue shares fell 21% to 137.53p on Tuesday morning, around a 19-year low.
“De La Rue is teetering on the brink," said analyst Neil Wilson at Markets.com.
“Far from ‘drawing a line’ under the previous performance before the arrival of Vacher and [chairman Kevin] Loosemore, the profits warning in October was only the meat in the rather unsavoury sandwich.
“Today’s update is worrying for investors because it suggests there’s more damage out there to be done to the shares."
Russ Mould at AJ Bell said: “In an increasingly cashless world one has to wonder just how long De La Rue can survive without a radical change to its business model.
“It has already restructured its operations into two divisions – authenticating goods as genuine and currency services – but one has to wonder if this is still enough to secure its future.
“The banknote print and security features markets are highly competitive and De La Rue hasn’t had the best track record with contract wins of late. We might have simply reached the point where De La Rue is best positioned as part of a bigger company rather than as a standalone entity.
“But would a potential suitor act now or sit on the side lines in hope that the price could get a lot cheaper?”