Despite delivering close to our expectations for FY19, De La Rue has hit another problem which undermines prospects for FY20. The abrupt end of the overspill supply to Venezuela due to sanctions not only leaves the company £18m out of pocket, but also having to accelerate optimisation efforts to adjust to the new, lower but sustainable banknote print volumes by 2021. The result is a 22% reduction in our FY20 EPS estimates with declining revenues through FY21. Combined with the announced change of CEO, even the dividend yield support now falls into question, although we feel the prospects are bright enough for its maintenance.
Our FY19 expectations were almost met but through a different divisional mix and before the exceptional credit provision of £18m. Sales and profits for Currency beat our estimates following the sale of Paper at the end of FY18. ID Solutions (IDS) and Product Authentication & Traceability (PA&T) missed our revenue estimates by 9%, with the former exceeding our adjusted operating profit and the latter missing. The payment shortfall from the Venezuela supply is of greatest significance. The invoiced high margin sales receipts could not be remitted to De La Rue due to sanctions. The upheaval in the country shows no signs of being resolved, so an anticipated manageable decline in volumes through FY20 has been replaced by an abrupt termination of activity, with a loss in revenue of around £100m for Currency.
The high profitability of Venezuelan supply means Currency margins will fall to c 5%, with lower return contract fill and despite increases at Polymer and Security Features. Proposed savings of c £20m should be front-end loaded, but are likely to only partly offset price pressure in Banknote Print as suppliers seek to fill freed up capacity. IDS was already compromised by the end of the UK passport contract in FY20, with the wind down agreed to start in November and a full impact in FY21. PA&T should grow strongly as the major Saudi Arabian and UAE contracts start full delivery. These factors reduce our FY20e EPS by 22% with a flat outlook for FY21.
A single-digit P/E ratio for FY20e and historic yield of 8% should normally be quite appealing. However, with lower cash flows and a new CEO perhaps reorienting strategy, the yield support cannot be seen as a given for now. We still feel the medium term will see a return to growth driven by the IP-rich authentication and security activities of the group. Our DCF value drops from 663p to 568p.