De La Rue has announced that its H120 profitability continues to be challenged and that market expectations for FY20 remain significantly too high. With no detail on the factors driving the weak performance, we are placing our forecasts under review pending H120 results on 26 November. With the arrival earlier this month of the new CEO, Clive Vacher, management is undertaking a detailed review of the business and we expect to hear at least initial thoughts on this with the H120 results. A full reset of the strategy may take more time but, given the reduced earnings capacity of both Currency and ID Solutions, the supportive dividend may be the first casualty.
The trading update indicates that H120 adjusted operating profit will drop to low to mid-single digits (£1–5m), compared to £17m in H119. With the International ID business sold, the UK passport contract winding down to its conclusion and the absence of any replacement for the highly profitable, but now curtailed, Venezuelan Currency revenues, we would expect H220 to also be significantly lower than H119, despite growth in the Product Authentication & Traceability (PA&T) division. When we have greater detail on the components of current performance, we will reset our estimates.
Both the chairman and the CEO were appointed in H119, and we would expect the detailed business review to deliver a modified strategy once it is fully formulated. The CEO, Clive Vacher, has significant experience of international business transformation and operational performance improvement.