Banknote printer’s money woes prompt insolvency fears

It may have a literal licence to print money, but banknote maker De La Rue warned on Tuesday of “significant doubt” that it can continue as a going concern.

The announcement knocked about 40 million pounds ($51m) off its market value, as the British printer said it would scrap its dividend to tackle mounting debt.

The news follows a series of setbacks, including two profit warnings, an investigation into suspected corruption in South Sudan and the loss of a contract worth at least 400 million pounds ($513m) for the United Kingdom‘s new post-Brexit blue passports – which will instead be produced by Franco-Dutch firm Gemalto.

“We have concluded there is a material uncertainty that casts significant doubt on the group’s ability to continue as a going concern,” De La Rue said in a statement, adding that it was focused on delivering a turnaround plan.

De La Rue, which appointed Clive Vacher as its chief executive last month, said it would conduct a review of its business that will speed up its restructuring plan to cut overhead costs and focus on inventory management.

Debts exceeding value

The more than 200-year-old firm, which holds the contract to design and manufacture the Bank of England’s new polymer notes, said its net debt had risen 58 percent to 170.7 million pounds ($219m), above its current market capitalisation of roughly 140 million pounds ($180m).

De La Rue said dividend and pension payments and inventory buildup due to changes in production schedules were among the reasons for its ballooning debt.

The company has a 275 million pound ($354m) loan due in 2021.

Before Tuesday’s announcement, De La Rue’s combined credit score – which measures how likely a company is to default in the next year on a scale of 100 (very unlikely) to one (highly likely) – was just four, Refinitiv Eikon data showed.

The company said its directors had considered a number of factors in reaching their conclusion on its outlook, including its half-year trading results and its access to credit.

De La Rue also faces competition from state-run and private firms, which has pressured its banknote printing margins, and the increasing popularity of digital payments.

“We might have simply reached the point where De La Rue is best positioned as part of a bigger company rather than as a standalone entity,” said Russ Mould, investment director at AJ Bell.

The company posted a half-yearly operating loss of 9.2 million pounds ($11.8m), compared with a profit of 10.1 million pounds ($13m) a year earlier, chiefly due to restructuring charges.

Although its adjusted operating profit plunged 87 percent to 2.2 million pounds ($2.8m) for the six months to September 29, De La Rue forecast it would do better in the second half as it expects more favourable currency volumes and benefits from cost cuts.

De La Rue expects annual adjusted profit of between 20-25 million pounds ($26-32m).