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This recovery stock’s share price has just jumped 20%. Here’s what I’d do now

Alan Oscroft
Dice engraved with the words buy and sell

Shares in De La Rue (LSE: DLAR), best known as a banknote printer, had lost more than 80% of their value since a peak in May 2015. Until Tuesday, that was, when details of the firm’s turnaround plan brought a little respite.

Coupled with a trading update, the announcement led to a 20% leap in the share price Tuesday morning.

De La Rue described trading during the first half as satisfactory, and “reconfirms the current guidance for adjusted operating profit for FY2019/20 of between £20m and £25m.” Liquidity problems have been a problem, but while there’s still serious debt pressure, the company reckons it’s going to be safe.

Costs, focus

The turnaround plan contains all the usual stuff about controlling costs, and focusing on what the firm does best. While that’s good, I always wonder why companies don’t do that all the time. Why do so many of them wait until they’re up to their necks in it before it strikes them as a good idea?

Analysts are forecasting a strong return to growth starting in the 2020/21 year, and I see that as critical. De La Rue’s £275m revolving credit facility expires in December 2021, and we need to see significant progress before then.

Would I buy the shares now? My answer is no. The latest updates are indeed positive, and the shares are on a low valuation. But this is still a company that’s in the midst of a debt crisis, and there’s not going to be a lot of safety margin in its recovery prospects. And that recovery needs to come quickly.

There’s potential here, but I want to see evidence of turnaround success before I’d consider buying.

Price crash

While De La Rue was one of the FTSE’s biggest early risers Tuesday, my second pick was one of the biggest fallers. It’s SIG (LSE: SHI), a supplier of specialist materials to the building trade, whose shares slumped by 15%.

The dump was triggered by the shock announcement that CEO Meinie Oldersma and CFO Nick Maddock have both resigned with immediate effect from their top positions and as directors.

The company issued a trading update too, telling us that 2019 performance is in line with guidance. We should be seeing underlying pre-tax profit of around £42m, though the results will now be delayed until the second half of April due to the board upheavals.

Once current disposals are complete, SIG reckons it will have “a robust balance sheet with a net cash position on a pro forma basis.” And that “will provide flexibility and scope for investment in the business where attractive returns can be made.”

Debt

When I looked at SIG in January after a couple of profit warnings, I didn’t like its debt position. And I doubted the wisdom of paying dividends during such tough business downturns. I also questioned the still high P/E valuations the market was affording SIG shares in the face of a big forecast EPS fall.

When the CEO and CFO both leave a company, the big fear is over what the new bosses might uncover. So, after the latest slump, I’m even more convinced that this is one to walk away from right now.

The post This recovery stock’s share price has just jumped 20%. Here’s what I’d do now appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020