The Investment Column: Worst seems over at De La Rue

It has been a tough three years for De La Rue shareholders. They have seen their investment in the banknote printer lose around two-thirds of its value as the darling of the recession became the currency-stricken laggard of the boom. From a high of 1,052p in 1995, on a 35 per cent premium to the rest of the market, the shares tumbled to as low as 325p during the summer, a similar-sized discount.

De La Rue has faced two big problems. First, there is too much capacity in the already mature banknote printing market and the company's previously fat margins have been steadily eroded until they are now merely comfortable. Second, 75 per cent of De La Rue's UK production goes overseas - it has been clobbered by the strong pound, which has risen by an average 22 per cent against other European currencies in a year.

Against that gloomy background, half year figures yesterday were rather better than expected with profits of pounds 56.3m. Strip out the currency effect and profits would have increased 8 per cent to more than pounds 64m, even if the real driver was De La Rue's associates, including Camelot, and not its core operations.

The key to the company regaining its previous rating is how successful it can be in rolling out new products in its cash-handling division, which makes banknote sorters, counters and dispensers, and in taking advantage of the inevitable shift from cash and simple plastic to highly complex smart card technology. Both areas have great growth potential. However, there is, of course, a world of difference between operating in a growth area and profiting from it and analysts still believe De La Rue's profits will be at best pedestrian this year and next. The current year forecast of just over pounds 100m is well down on last year's pounds 121m which probably won't be beaten next year, either. The worst appears to be over for the shares, however, and at yesterday's 410p, up 12.5p, they are reasonable value, supported by a 6 per cent net yield.

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