Central Bank Outsourcing Hits Right Note

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The number of banknotes that are produced by private contractors is likely to double over the next two decades in a "gradual but remorseless" trend for central banks to outsource,[link widoczny dla zalogowanych], according to De La Rue.
Although monetary authorities in key markets including the US, Russia and China were unwilling for security reasons to farm out production, others were likely to follow the example set by the Bank of England,[link widoczny dla zalogowanych], said James Hussey, De La Rue chief executive.
EDITOR'S CHOICE
In the job since the turn of the year,[link widoczny dla zalogowanych], Mr Hussey said the banknote printer was well placed following a reorganisation and sale of its cash systems business.
Revenue in the six months to September 26 rose from ￡244.7m to ￡252.2m, while an "unusually favourable mix of work" helped operating profit rise 17 per cent.
However, the performance of its remaining cash processing operations – which made an operating loss of ￡1.6m ($2.7m) – disappointed analysts. The shares fell 16?p to 959p.
Mr Hussey said a recent ￡400m contract win to supply the UK's biometric passports was "the sort of thing I'm talking about in terms of the growth of our non-banknote business".
Interest charges weighed on the bottom line,[link widoczny dla zalogowanych], and pre-tax profit fell from ￡47.2m to ￡44.2m. Earnings per share were 31.7p (220.5p), and the interim dividend rises from 13.7p to 14.1p.
● FT Comment
Famously secretive due to the sensitive nature of its work, De La Rue was typically coy on Tuesday on what had lifted operating margins at its currency division to an impressive 25 per cent. Cazenove, its broker, suspects "extraordinary political events". In any case, the performance is unlikely to be repeated. Further central bank outsourcing remains a long-term trend: liberalisation of the euro market will not take place until 2012. Security and identity products are the most likely drivers of medium-term growth. The shares have lost ground in recent weeks,[link widoczny dla zalogowanych], leaving them yielding 4.5 per cent and trading on 13.1 times prospective earnings. Its main competitors, including Giesecke & Devrient of Germany, are private companies and comparisons with the support service sector are not helpful. Only two of the independent analysts that cover the stock have a "buy" recommendation. The multiple seems about right for a cash-generative stock that should remain defensive.

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