De La Rue has announced it is selling its International ID Solutions business for £42m. Following the loss of the UK Passport Contract last year, the remaining activities lacked critical mass in a consolidating sector and disposal to Assa Abloy has been deemed to be the most favourable solution. The deal will be earnings dilutive as the passport contract winds down and by the end of FY20 there will be no contribution from ID Solutions from FY21. Our EPS for FY21 is reduced by 8% to 31.9p.
De La Rue is selling its international identity solutions contracts to HID Corporation Limited (HID Global), a subsidiary of Assa Abloy of Sweden. The cash proceeds of £42m will be subject to usual working capital adjustments and will be received on completion, which we expect early in H220. In FY19 the activity being sold had revenues of £37.8m and an operating profit of £2.3m after allocated central costs. With the winding down of the UK Passport Contract also expected by the end of FY20, the remaining single-digit revenue ID security features and components will be absorbed into the new Authentication division.
With the already announced reorganisation and restructuring creating a twodivision structure for the group, the exit from the ID Solutions activities helps to simplify the business. Security Features will move from Currency, as will the small element of retained security products and components in the ID business to join the existing Product Authentication and Traceability business in the newly created Authentication division. The reorganisation should provide a significant portion of the recently announced £20m of costs savings by removing associated overheads, not least relating to the ID Solution activity. Currency will consist of the Banknote Print activity and the growing Polymer substrate business. FY21 revenue and profits now look a relatively clean basis on which to base future expectations.
After the dilution that the complete withdrawal from ID Solutions generates, a single-digit P/E ratio for FY21e looks undemanding. Our DCF value falls by 8% to 522p (from 568p) reflecting the reduction of future earnings and a 1.4% increase in share count. While the dividend yield looks supportive, the market is regarding the low level of cover and the reducing cashflow stream as likely to lead to a rebasing. While we have maintained the payment in our current forecasts, it is worth noting that c 2x covered dividend in FY21 of 16p would still provide a yield of over 5%.