How much is De La Rue worth?

No one expected miracles from De La Rue given the banknote printer issued a profits warning just two months ago. Challenging market conditions will chop £20 million from this year's profits and reverberate into the next. Chief executive Martin Sutherland has only been in the job six weeks and while the early signs are promising, there's work needed to turn this ship around.

Revenue was down 8% during the six months to £214.9 million, although underlying pre-tax profit, which strips out £2.5 million of one-off charges for site relocation and restructuring, tumbled over a third to £20.6 million. Earnings per share (EPS) fell by nearly 40% to 15.9p and the dividend is slashed to 8.3p from 14.1p.

Print volumes rose by 4% to £2.7 billion, but oversupply in the paper market put pressure on banknote paper volumes, down 4% to 4,500 tonnes.

"In the period, despite challenging market conditions, we have maintained our market share through adopting a more tactical approach to both pricing and the utilisation of spare capacity," said the company. "In addition the ongoing benefits of the process improvement and asset care programmes have enabled us to mothball some surplus paper making capacity."

Crucially, De La Rue is still winning key business, with the Bank of England renewing its 10-year contract in October. The 12-month order book grew by £4 million to £222 million, but the company's passport business attracted fewer new customers. De La Rue’s three-year improvement plan, which generated annual savings of £40 million, came to an end last year, but the company still managed to find an extra £3 million of savings in the period. More will come, most likely at the underperforming solutions division.

"These difficult market conditions are anticipated to continue into the next financial year and together with certain contractual price reductions on a number of long term contracts, which will come into effect in 2015/16, will impact margins and profitability as previously stated," said the firm, which repeated its warning of a £20 million slump in full-year profit.

Investec Securities upgrade its recommendation to 'add' from 'hold', but lowered its target price to 560p from 600p, reflecting a fall in the 10-year price/earnings (PE) average to 14.9 times unchanged EPS estimates of 37.3p.

If restructuring goes to plan and the new boss gets a grip both on costs and operational issues, De La Rue has a clear path back to pre-profit warning levels of 759p. But that's not now, and the City will require evidence of a sustained recovery in earnings before backing the shares, even at these depressed levels.

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