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For a company that prints banknotes, there is a certain irony in Of the street (LSE: DLAR) stock price for cents. But after a 44% drop in share price over the past year, the company is selling for less than a pound a share.
The company has some unique competitive advantages. So should I take advantage of the current share price to add it to my portfolio?
Changing the world
De La Rue has had a strong business for several centuries printing banknotes for central banks around the world. That’s still a major source of revenue. But as the world shifts to a higher rate of digital payments, the company has broadened its horizons while building on its established experience. For example, it produces authentication products like the tax stickers seen on alcohol and tobacco in many markets.
This business mix makes sense to my mind. But it hasn’t been enough to stem the decline in revenue. In the first semester they fell by 8.3% compared to the same period of the previous year. Having a license to print money is not necessarily a license to print money!
Authentication division revenue grew 2.5% year-over-year, while the Small Identity Solutions division posted double-digit percentage revenue growth. The problem for De La Rue is that the currency division accounts for the lion’s share of revenue. That division experienced a revenue decline of 12.3%.
Should it sell for pennies?
De La Rue currently has a market capitalization of around £128 million. He had net mid-stage debt of £87m, meaning he has an enterprise value of approximately £215m.
It has been consistently profitable in recent years. Even at its low point in 2021, annual profit after tax was £8.5m. Last year it was £22.9 million.
For the full year, the company expects adjusted operating profit of between £30m and £33m. That’s a different measure than unadjusted after-tax earnings, but it underscores that De La Rue continues to have strong earnings potential despite his challenges.
To me, De La Rue’s current share price makes it look cheap.
But I see some significant risks that could explain the price. Demand for notes may be in structural decline in the long term, which could severely damage the economics of De La Rue’s business. Company performance can be severely affected by the loss of a single contract, as we have seen in the past. The debt stack will also need to be paid off at some point, which will reduce profit.
In for a pound?
I considered buying De La Rue shares for pennies each in the first half of 2020. I decided against it, and they quadrupled in less than a month! He could have been sitting around quite a bit if he had decided to invest back then.
The decreasing price gives me another chance to buy for less than a pound each. I still see a lot to like in the business. But I think the stakes are too high for my liking. So I’m not going to buy.
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