Broker snap: 800p a realistic price for De La Rue

6th Dec 2010 13:07

There is nothing like a bid approach to make a broker reassess the value of a stock and bank note printer De La Rue is no exception to the rule.Confirmation that the crisis-torn company has received a bid approach, believed to be from French rival Oberthur, has prompted Panmure Gordon to whack up its target price from 470p to 800p, and switch its rating from "sell" to "hold".Panmure Gordon thinks an offer of around 750p to 800p would represent "a realistic take-out level given the possibility of significant reputational damage in the wake of the falsification of production standards.""We have suspected for some time that any interest in De La Rue would only come from a competitor given the problems any private equity firm would face in due diligence given the nature of the business, and despite the market position and scarcity of the asset we believe it unlikely this will become a bidding war. The accuracy of reports on 750-800p needs as always to be taken with a pinch of salt until confirmed, though a material premium to this - in our opinion - looks unlikely given the recent trading update," the broker said.At a price of 800p De La Rue would be trading on a multiple of 10.5 times recent peak earnings (year to March 2010) which, given the reputational damage caused by the company's recent problems, Panmure Gordon thinks De La Rue will struggle to return to in the short to medium term."On current forecasts this multiple would rise to 35.7x to March 2011, dropping to 28.2x - a more than generous valuation given the unquantifiable risk of reputational damage as its current order book unwinds and new contracts come up for negotiation. We see little possibility that there will be anything but margin pressure, and that there remains a more than decent chance of its largest client terminating its current contract given the length of time negotiations over production problems have been under way," the broker concluded.