What do rampant inflation, a change in the head of state and the birth of a new country have in common? They are all good news for bank note printers. Unfortunately the past year afforded few such instances. As a result, flat volumes drove revenues at De La Rue, the world’s largest commercial bank note printer, down 8 per cent over the year that ended in March. Only cost cutting helped the 200-year-old company to keep operating profit flat at ￡63m.
Even so, contrary to the belief that electronic payment will wipe out the need for hard currency, the amount of cash in circulation is growing. The International Monetary Fund says the compound annual growth of money in circulation over the past decade is as high as 16 per cent in Latin America and 7 per cent in the UK. About 85 per cent of the 150bn bank notes printed globally each year come from state-owned print works. De La Rue, Germany’s Giesecke & Devrient, France’s Oberthur, and smaller Russian and US competitors, fight for the rest.
The trouble for De La Rue is that its German and French peers have boosted production, which has led to overcapacity and put pressure on prices. Thus the UK company is relying on reducing its fixed cost base, and eking out more from its suppliers for less to bolster operating profits. It plans to hit a ￡100m operating profit target in the year to March 2014, through ￡40m in cost savings. Still, De La Rue’s profit forecast also assumes some volume growth. The hope is that this will come from overspill, whereby central banks have underestimated demand and need to turn to commercial suppliers to meet the shortfall. De La Rue’s shares fell 2 per cent yesterday after its results. That has extended a small lag versus the FTSE 250, which is up by a quarter during the past two years. The shares have been getting cheaper since 2010. Shareholders need a little instability.