Bluechip: No licence to print money

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The Independent Online
De La Rue the company best known for its banknote business, took another step forward last week in its drive to reposition itself for the time when electronic payment systems dominate.

It paid pounds 54.2m to buy the smart card business of Dutch electronics group Philips, with sales of pounds 30.6m, with pre-tax losses of pounds 500,000.

The deal is a boost for De La Rue's card operations, which are mostly magnetic cards, where sales last year were about pounds 80m, against pounds 268m for the banknote and specialist paper business.

Since a high of 1052p, hit in early 1995, the shares have fallen all the way to 502.5p, where they closed on Friday, although news of the deal saw them perk up briefly.

It is clear that the banknote business, while mature, has been more volatile than one would expect. Smart cards - where the user can draw cash from his bank account, onto the card - are likely to represent the money of the future.

De La Rue is also a leader in cash systems, which does everything from selling banknote handling systems to producing the holograms used on Visa cards. At its last interim figures, in November, the group disclosed a fall in pre-tax profits to pounds 60.3m from pounds 69.1m.

A couple of years ago, the company was on a roll, as the newly-created republics of central Europe, and especially the old USSR, spawned enormous demand for new currencies.

But that one-off gain has now faded, and while De La Rue claims a 60 per cent worldwide market share of the banknote business, it is under attack on several fronts. The high margins it still earns are an invitation to competitors, and pricing pressures are severe, says De La Rue.

Rivals have also been helped to steal a gain on De La Rue with fat contracts from European central banks. It has also all but completed the disposals arising from its acquisition of Portals in 1995.

Full-year figures, due out shortly, are unlikely to see profits much above pounds 135m. On that score, the shares trade on a forward ratio of 12.7 times earnings.

In the long term, De La Rue could yet return to favour, as smart cards and magnetic cards overtake more traditional paper-based money. That era is some way off yet though. In the meantime, given the pressures in the old fashioned banknote business, the shares are high enough.

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