Bottom Line: De La Rue has a difficult act to follow

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The Independent Online
DESPITE another set of impressive results, showing a 34 per cent rise in pre-tax profits to pounds 104.7m and a 24 per cent increase in earnings, the City's infatuation with De La Rue - which caused the share price to rise twice as fast as the stock market from the beginning of 1991 - seems to have faded since the autumn.

This may seem a rather uncharitable response to a company which, under its chief executive Jeremy Marshall, has done exactly what it said it would do. Internal bullets have been bitten and a big acquisition, Inter Innovations, funded by a rights issue, has, as promised, enhanced earnings in its first year of ownership.

The outperformance did indeed leave De La Rue shares on a very demanding rating and the management, although it produced further profits growth this year with the benefit of strong order books, has given itself a pretty difficult act to follow. Two crucial questions need to be answered before the shares regain their former attraction.

When will the badly scarred banking systems of Western Europe and North America regain their confidence and begin to invest heavily again in the hardware for payments systems in which De La Rue has established such a strong position?

And what will be the next acquisitive corporate move by the company? Strong cash generation, partly due to working capital efficiencies and partly to advance payments for new banknotes from the new issuers in Eastern Europe, lifted net bank balances last year from pounds 111.5m to pounds 170.9m.

The City and current management well remember ill-fated and costly attempts in the past to diversify into such over-hyped areas as the convergence of electronics and printing. This will not happen again but the criteria for acquisition - they must be in closely related areas and enhance earnings in the first year - are demanding, and II was something of a rarity.

In the meantime, the break-up of the Soviet empire, which encouraged 26 new states to issue currencies last year, has offset the impact of recession and competition for De La Rue's other security printing operations. Underlying profits edged up from pounds 40.3m to pounds 42.9m and margins improved to 19.3 per cent in the second half.

There are further benefits to come in payments systems from the II acquisition as manufacturing rationalisation in Sweden and the US is finally completed.

The company could make up to pounds 115m this year, implying a p/e of 16.3 at 668p or a 25 per cent premium to the market, while the prospective dividend yield of 3.4 per cent is hardly cheaper. Don't expect renewed outperformance just yet.

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