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 |
Withdrawal from subscale activity |
Sale of International ID |
Industrial support services |
14 June 2019 |
Share price performance
Business description
Next events
Analyst
De La Rue is a research client of Edison Investment Research Limited |
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.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/18** |
461.4 |
47.5 |
38.2 |
25.0 |
8.0 |
8.2 |
03/19 |
516.6 |
54.1 |
42.9 |
25.0 |
7.1 |
8.2 |
03/20e |
493.0 |
42.9 |
32.7 |
25.0 |
9.3 |
8.2 |
03/21e |
390.7 |
41.2 |
31.9 |
25.0 |
9.5 |
8.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated for the sale of Paper and IFRS 15.
Sale of International ID
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.
A simplified business moving forward
With the already announced reorganisation and restructuring creating a two-division 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.
Valuation: Rating still looks unduly low
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%.
Earnings revisions
We have assumed the disposal of International ID completes in October 2019. We have also corrected the average share count for FY20 and FY21 with a 1.4% increase to 103.8m. A summary of the changes to our estimates is shown below.
Exhibit 1: De La Rue earnings estimates changes
Year to March (£m) |
2020e |
2020e |
|
2021e |
2021e |
|
|
Prior |
New |
% change |
Prior |
New |
% change |
Currency |
355.0 |
355.0 |
0.0% |
291.1 |
291.1 |
0.0% |
ID Solutions |
77.1 |
61.3 |
-20.4% |
59.4 |
0.0 |
-100.0% |
PA&T |
76.6 |
76.6 |
0.0% |
99.6 |
99.6 |
0.0% |
Sales |
508.7 |
493.0 |
-3.1% |
450.1 |
390.7 |
-13.2% |
|
|
|
|
|
|
|
EBITDA |
72.8 |
69.8 |
-4.2% |
75.1 |
67.9 |
-9.5% |
|
|
|
|
|
|
|
Currency |
19.5 |
19.5 |
0.0% |
21.8 |
21.8 |
0.0% |
ID Solutions |
12.3 |
9.8 |
-20.4% |
4.7 |
0.0 |
-100.0% |
PA&T |
20.7 |
20.7 |
|
26.9 |
26.9 |
|
Underlying EBITA |
52.5 |
50.0 |
-4.8% |
53.5 |
48.7 |
-8.9% |
|
|
|
|
|
|
|
Underlying PTP |
44.4 |
42.9 |
-3.5% |
44.0 |
41.2 |
-6.3% |
|
|
|
|
|
|
|
EPS - underlying continuing (p) |
34.4 |
32.7 |
-5.0% |
34.6 |
31.9 |
-8.0% |
DPS (p) |
25.0 |
25.0 |
0.0% |
25.0 |
25.0 |
0.0% |
Net debt / (cash) |
140.2 |
97.7 |
-30.3% |
155.3 |
113.3 |
-27.0% |
Source: Edison Investment Research estimates
Exhibit 2: Financial summary
£m |
2018 |
2019 |
2020e |
2021e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
461.4 |
516.6 |
493.0 |
390.7 |
EBITDA |
|
|
78.4 |
79.5 |
69.8 |
67.9 |
Operating Profit (before amort. and except.) |
|
|
59.5 |
62.8 |
52.9 |
52.1 |
Intangible Amortisation |
(2.6) |
(2.7) |
(2.9) |
(3.3) |
||
Exceptionals |
74.6 |
(28.6) |
(20.7) |
(2.7) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
131.5 |
31.5 |
29.3 |
46.0 |
||
Net Interest |
(9.4) |
(6.0) |
(7.2) |
(7.5) |
||
Profit Before Tax (norm) |
|
|
47.5 |
54.1 |
42.9 |
41.2 |
Profit Before Tax (FRS 3) |
|
|
122.1 |
25.5 |
22.2 |
38.5 |
Tax |
(18.9) |
(4.8) |
(3.5) |
(6.2) |
||
Profit After Tax (norm) |
40.3 |
45.4 |
35.2 |
34.5 |
||
Profit After Tax (FRS 3) |
103.2 |
20.7 |
18.6 |
32.4 |
||
Average Number of Shares Outstanding (m) |
101.9 |
102.9 |
103.8 |
103.8 |
||
EPS - normalised (p) |
|
|
38.2 |
42.9 |
32.7 |
31.9 |
EPS - normalised and fully diluted (p) |
|
|
37.8 |
42.7 |
32.7 |
31.9 |
EPS - (IFRS) (p) |
|
|
93.6 |
16.5 |
16.8 |
29.8 |
Dividend per share (p) |
25.0 |
25.0 |
25.0 |
25.0 |
||
EBITDA Margin (%) |
17.0 |
15.4 |
14.2 |
17.4 |
||
Operating Margin (before GW and except.) (%) |
12.9 |
12.2 |
10.7 |
13.3 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
149.0 |
155.6 |
117.9 |
120.6 |
Intangible Assets |
29.5 |
33.3 |
36.2 |
38.7 |
||
Tangible Assets |
112.8 |
115.0 |
74.4 |
74.6 |
||
Investments |
6.7 |
7.3 |
7.3 |
7.3 |
||
Current Assets |
|
|
179.9 |
219.7 |
209.8 |
178.9 |
Stocks |
34.1 |
42.3 |
41.4 |
37.1 |
||
Debtors |
102.3 |
139.3 |
130.6 |
105.5 |
||
Cash |
15.5 |
12.2 |
12.2 |
12.2 |
||
Other |
28.0 |
25.9 |
25.6 |
24.1 |
||
Current Liabilities |
|
|
(252.7) |
(321.6) |
(302.0) |
(289.0) |
Creditors |
(187.3) |
(201.9) |
(192.5) |
(164.3) |
||
Short term borrowings |
(65.4) |
(119.7) |
(109.9) |
(125.5) |
||
Long Term Liabilities |
|
|
(96.6) |
(82.9) |
(61.9) |
(39.9) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other long term liabilities |
(96.6) |
(82.9) |
(61.9) |
(39.9) |
||
Net Assets |
|
|
(20.4) |
(29.2) |
(36.6) |
(30.2) |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
93.2 |
(6.3) |
21.5 |
43.6 |
Net Interest |
(4.6) |
(3.8) |
(3.9) |
(5.1) |
||
Tax |
(30.6) |
(0.9) |
0.6 |
(5.6) |
||
Capex |
(24.7) |
(25.4) |
(24.7) |
(22.5) |
||
Acquisitions/disposals |
57.7 |
0.2 |
42.0 |
0.0 |
||
Financing |
2.0 |
4.3 |
0.0 |
0.0 |
||
Dividends |
(25.8) |
(26.2) |
(25.7) |
(26.0) |
||
Other |
3.8 |
0.5 |
0.00 |
0.0 |
||
Net Cash Flow |
71.0 |
(57.6) |
10.2 |
(15.6) |
||
Opening net debt/(cash) |
|
|
120.9 |
49.9 |
107.5 |
97.7 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
(0.0) |
0.0 |
||
Closing net debt/(cash) |
|
|
49.9 |
107.5 |
97.7 |
113.3 |
Source: Company data, Edison Investment Research
|
|
Recent updates indicate Bonesupport has been making progress in all key strategic directions. Sales have started to rebound in the US since the company started commercialising its CERAMENT bone void filler in Q418. The top-line results from the clinical CERTiFy study released in Q418 are also helping to increase awareness. CERAMENT G/V will be included in a new, large investigator-led SOLARIS study, which could potentially change the standard of care in osteomyelitis treatment. Our valuation is largely unchanged at SEK1.73bn or SEK33.1/share (vs SEK33.5/share).
Get access to the very latest content matched to your personal investment style.