You would think that legally printing money is just about the most profitable business possible. Unfortunately, things aren’t quite that simple and De La Rue, the printing company responsible for printing banknotes for the UK and a number of other countries, has issued a profit warning.
Shares in the company plummeted 30% following the issuance of the warning. The company pointed to trading conditions that have “deteriorated” as the reason it is expected to make £20 million less this year than in 2013/2014.
De La Rue’s banknote printing activities have involved more than 150 countries around the world. The company has also been involved with printing passports and other identity documentation for 65+ governments around the world. De La Rue is responsible for creating biometric passports for the UK, and is set to print the upcoming plastic banknotes for the Bank of England.
According to De La Rue, market conditions are squeezing profit margins and prices on its specialist printing services, particularly on the secure and durable linen-based paper that is used for most banknotes. This, combined with lower-than-expected new business growth rates in recent months and a “disappointing” global move towards biometric passport usage, put the company in a difficult position.
Though this range of factors all play their role in putting the company’s profits under strain, many remain certain that the real, central cause of the problem still lies with De La Rue’s banknote printing activities. While just this month the company was named as the preferred provider for a new UK banknote printing contract, tying this activity to them for the next decade, they only received a lower-than-expected price.
Kevin Doran, who is chief investment officer at Brown Shipley, said that “The profits warning is the result of pricing pressure being seen in the banknote printing business, including in the renewed deal with the Bank of England.”
Doran also described the Bank of England’s decision to demand a lower price for the new contract as an example of acting “more commercially.” Doran also suspects that other central banks around the world may follow this example and also request better deals, which would put further stress on De La Rue’s profit margins.
“When [other De La Rue customers] come back to renew existing contracts,” Doran said, “they will push for the same price reductions that the Bank of England has demanded.”
Last year, the company achieved operating profits of £89.3 million, which also prompted a profit warning as it fell below targets. This year’s figure is expected to fall short of that level by £20 million.