May 30, 2018 / 6:39 AM / 3 months ago

UPDATE 3-De La Rue says on the mend after Brexit passport blow

* FY op profit fell 11 pct, in line with lowered guidance

* Shares up 3.6 pct; Investec sees progress on strategy

* Net debt at five-year low (Adds shares, analyst comment, CEO comment from call)

By Justin George Varghese

May 30 (Reuters) - British banknote and passports maker De La Rue said the sale of its struggling paper business and investments in new technology would help it recover from a plunge in profits due in part to a failure to win a post-Brexit passports contract.

The company said on Wednesday it expected adjusted operating profit to be flat in the year ending March 31, 2019, compared with an 11 percent drop in the year ended March 31, 2018.

De La Rue sold its paper unit last year to reduce its dependence on volatile commodity prices and is investing in high-technology offerings such as anti-counterfeit software that are less capital-intensive and more profitable.

Its shares were up 3.6 percent at 521 pence as of 0914 GMT, though they are still down 18 percent since the start of 2018 following two profit warnings due to the failed Brexit passport bid and contract delays.

“While losing the new UK passport tender was disappointing, it does not change our goals, nor does it detract from the underlying performance of the group which remains strong,” said chief executive Martin Sutherland.

De La Rue’s adjusted operating profit fell to 62.8 million pounds ($83.2 million) in the year ended March 31, from 70.7 million pounds a year earlier. Excluding the paper business, adjusted operating profit rose 7 percent.

Full-year revenue rose 7 percent to 494 million pounds, and the company kept its full-year dividend per share at 25 pence.

“There are encouraging signs that growth is starting to appear in areas of the business where investment has been made,” Investec analysts wrote in a note, keeping their “buy” rating on the stock.

Proceeds of 60 million pounds from the paper unit sale, along with a huge reduction in pension liabilities due to a change in the inflation measure the company uses to calculate the deficit, helped De La Rue more than halve its net debt to 49.9 million pounds, its lowest in five years.

“What we like to do is to use the proceeds of the paper sale ... to drive strategic growth going forward organically and maybe inorganically,” Sutherland told analysts on the call when asked about his priorities for the company’s cash pile. “We are not going to give it back to shareholders.”

De La Rue lost the contract for Britain’s new post-Brexit blue passports to Franco-Dutch digital security group Gemalto , leading to a 3.7 million-pound write-off.

The company’s troubles were compounded by the resignation of chief financial officer (CFO) Jitesh Sodha in March. Helen Willis, most recently CFO of electronics distributor Premier Farnell, has taken over as interim finance chief.

$1 = 0.7543 pounds Additional reporting by Sangameswaran S in Bengaluru; Editing by Georgina Prodhan and Mark Potter

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