De La Rue continues to pursue a strategy that is transitioning the company to a less capital-intensive operation with a more diverse customer base and revenue streams, incorporating more embedded technology and IP. Underlying progress is apparent although masked by the disposals and the recent loss of the UK passport contract. The strengthening of the balance sheet enables appropriate M&A to augment what we expect to be a resumption of organic sales growth from FY21. The current rating implies scepticism but this should improve as growth prospects are recognised. In the meantime, the healthy dividend yield provides support for investors.
De La Rue is the largest commercial banknote printer globally and has designed 36% of all the banknote denominations in circulation. In a constant battle against increasingly sophisticated fraud and counterfeiting, it has developed a range of layered security features, services and software solutions that can prove authenticity. These can be applied to banknotes, revenue protection for consumer goods and excise authorities, as well as personal identification. Since 2015 the strategy has been to invest in growth areas such as polymer banknotes, security features and product authentication and tracking, while improving returns in the more mature banknote print operation. It has involved optimal exits from the noncore activities of cash processing machine and banknote paper. The strategy builds on De la Rue’s core reputational strength as a design authority and security printer.
Success of the strategy is apparent in the expected doubling of sales of Product Authentication & Traceability over the next three years as major long-term tax stamp contracts begin and consumer brand protection share grows. It should largely offset the £40m sales decline in ID Solutions over 18 months from October 2019, resulting from the loss of the UK passport contract. We expect Currency to remain relatively stable now print capacity has been optimised, with polymer expanding rapidly and improving returns as it benefits from its rapid share gains. With strong demand for security features across the group, we expect a return to growth in FY21.
Our fair value DCF returns a value of 639p a share, a healthy 49% premium to the current share price. The implied P/E for FY20e of 13.9x is hardly demanding compared to the support services segment calendar 2019 P/E multiple of 14.8x. In our view, the current rating of 9.7x FY20 EPS with a yield of 5.8% does not reflect growth potential.