Investment Column: De La Rue loses its sex appeal

Two years ago, De La Rue looked like a sexy, go-go business. Then its shares stood at over pounds 10 and it enjoyed a heady rating of almost 20 times earnings. Now, after three profits warnings and yesterday's disappointing results, it has become abundantly clear that the group's core business of banknote printing is mature, over supplied and cyclical.

As bumper work from newly emerging Russian states has declined, so has De La Rue's share price, which fell a further 13 per cent to 421.5p yesterday after underlying profits for the year to March dropped 19 per cent to pounds 120m. Neither of the group's other two divisions - cash handling and transaction systems - can compensate for the tough banknote market. With only the euro, whose launch is growing increasingly uncertain, and the remote potential of the smartcard market to offer brighter growth prospects, analysts have downgraded profit forecasts. Merrill Lynch cut its 1998 numbers from pounds 127m to pounds 110m.

Profits from security paper and banknote printing fell 19 per cent to pounds 62m, with margins 4 per cent lower as the costs of providing better quality notes outweighed a small rise in paper prices. With a hefty 60 per cent of the world market for privately printed banknotes, De La Rue can run the business more cheaply than most competitors, but it is becoming increasingly reliant on unpredictable and short contract overspill work - providing governments with top-up capacity. De La Rue's acquisition of Philips' smartcard business could pay off, but given heavy upfront investment, profits from that division will be flat for at least the next two years. The only growth area is cash handling and security systems, helped by new management and new products.

The shares look fairly valued on 12 times forward earnings, but add in the scope for more disappointment, like the Camelot associate losing its lottery franchise, and there is no reason to buy the shares.