Broker snap: De La Rue to take a pounding

4th Oct 2010 11:52

Troubled bank note printer De La Rue is still on Panmure Gordon's sell list, and the broker has cut its price target to reflect reputational damage the company has suffered from the revelation that some of its employees had been deliberately falsifying paper specification test certificates for bank notes."We have little confidence in current forecasts given the nature of recent problems and the potential implications of the fraud discovered in July. While the indicated impact on the current year is considerable, we believe the risk remains firmly on the downside given the ongoing ramifications of a loss of reputation in what are highly sensitive currency markets," Panmure Gordon said.The broker cut its price target for the stock from 605p to 529p, saying the company had suffered "unquantifiable damage" to its reputation, the full extent of which could take a considerable time to emerge. In previous economic downturns the contract visibility of De La Rue would have made it a favourite defensive stock, but with numerous contracts due for renewal over the next 12 months the broker is waiting to see how customers will react; Panmure Gordon's guess is that De La Rue will be obliged to swallow smaller margins.Over the medium term there is a risk that the company could lose its lucrative Indian contracts."With increased investment in banknote paper production capacity, India - a considerable customer for the group - could be largely self-sufficient by 2013. This potential loss of business could leave both a difficult hole to fill, a geared impact on the bottom line, and a risk to our future dividend assumptions," the broker gloomily suggested.