Sprue Aegis bid - a win for sound investment methodologies

Tuesday, Apr 30 2013 by
7
Sprue Aegis bid  a win for sound investment methodologies

Yesterday's announcement that the $5bn Jarden Corporation was making a bid for ICAP Securities Exchange tiddler Sprue Aegis wouldn't have threatened many headlines, but hidden within this story and the share price breakout are plenty of pearls that investors can learn from.

Sprue Aegis is the kind of company that the City neglects to its regret but that private investors are so able to take advantage of. On average only £15,000 of Sprue's shares have traded each day over the last few months. Clearly institutional fund managers can't trade companies like this without the share price soaring so they tend to completely ignore them unless they can pick up a big line of stock in a placing. It's for this reason that one can so often find hidden gems amongst the smallest companies on the market.

Sprue has certainly been a hidden gem in recent years but what the Jarden Corporation knows that the City doesn't is that Sprue has built up an impressive track record of innovation, execution and excellence in its tiny niche - clearly they think it worth bidding up for.

What's in the silly name?

Sprue Aegis is a fairly young company with a fascinating story beginning in 1998. The founders had decided on their business model before they even decided what products to make. They wished to build plastic electronics devices in a global market without strong brands where the user experience was poor. But it was only when they spotted a broken fire alarm hanging from a ceiling that the proverbial lightbulb switched on.

15 years later and Sprue is the UK market leader in home safety products (smoke and carbon monoxide alarms), with exclusive supplier status to Tesco and B&Q and exclusive rights to distribute many of minority shareholder Jarden Corporations products too. Meanwhile increasing domestic safety legislation across Europe provides a growing market for the company to sell into.

I'm not going to go into the details of the story here as there are some excellent write ups about Sprue Aegis already on the web. Glasshalfull has promoted the investment case extensively on the Motley Fool and on ADVFN, while all credit should go to David Stredder for bringing the company to many private investor's awareness at his Mello meetings.

Beyond the 'story'...

As many will know from my speech & presentation at Master Investor, I am not the kind of investor who gets too swayed by stories. Stories separate fools from their capital endlessly - what matters most are the fundamentals of a business. As the father of value investing, Benjamin Graham, stated so clearly - "in the short run the market is a voting machine, but in the long run it's a weighing machine" - placing capital in companies with strong fundamentals at attractive prices is the way to investment success and it's this ethic that drives the ongoing development of our feature set at Stockopedia.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

Those paying attention lately around Stockopedia will have noticed we've launched a set of StockRank  for every company in the market. Sprue Aegis before the bid yesterday was the second highest ranked company in the entire UK stock market out of more than 2000 stocks based on our proprietary 'Composite StockRank' which equally weights four contributing factors - QualityRank, ValueRank, GrowthRank and MomentumRank.

It is not easy at all to rank highly on these lists. The QualityRank favours the kind of profile that Warren Buffett might prefer - those displaying very high margins, profitability, cash flow and earnings quality. The GrowthRank favours companies with exceptional historic and forecast earnings growth. While the ValueRank and MomentumRank obviously highlight companies that are cheap and with fast moving share prices. Finding companies ranking highly across the board using the CompositeRank is another way to find hidden gems in the stock market - just as for Sprue Aegis which was ranking 99/100 before the bid and most importantly 93/100 on the QualityRank.

As I discussed in a previous post - Warren Buffett became exceptionally wealthy by focusing on buying cheap, safe, high quality stocks. Being so small, Sprue Aegis could always be at the mercy of competitive threats should a big competitor enter the domain, but given the company's powerful position in its niche and the fact that the market for these products isn't that big you have to wonder why any big competitor would bother. Indeed for a competitor - it's much easier to just buy companies like Sprue outright than attempt to recreate them using hired hands which is why they tend to end up as buyout candidates. Not that the board of Sprue Aegis has budged at all - they responded to the bid by saying - "Due to illiquidity and the tightly-held nature of the shareholder base, the Company's share price as quoted on the ISDX does not reflect fair value and is therefore irrelevant" and that they "are unable to recommend that Sprue Aegis shareholders accept the Offer"

In conclusion

The point of this article is not to highlight Sprue Aegis in particular but to illustrate several things about the way the stock market works.

  • Firstly, the market in small caps and especially micro cap stocks is terribly inefficient as institutional money can't unlock the value. It's a hunting ground for frontier minded private investors and private corporate buyers.
  • Secondly, the stock market always eventually unlocks the value in cheap, growing, quality companies but often over timeframes can be rather inconvenient - the patient are rewarded.
  • Thirdly, there are several ways to find these hidden gems in the market - you can diligently read bulletin boards or go to company events and hope to stumble upon a good story and/or you can use a robust systematic approach such as we promote at Stockopedia to filter the market quickly down to these kind of candidate stocks.

For those that don't have the time to endlessly read bulletin boards or those that want to cut through the crap that is so often posted by over-enthusiastic shareholders online, the analysis tools at Stockopedia are, as Prospect Magazine described them yesterday,  "a godsend". Sprue Aegis, to me, is another example of the kind of stock that David Stevenson wrote about in his recent article in FT Money.

"How might an ordinary investor, who does his or her own stockpicking, unearth a gem like Dart? Most likely using web-based, online systems such as those developed by Stockopedia."

For the full list of top ranked stocks you can browse the Share Directory or fork this screen here - we'll be adding these ranks to Stock Reports soon. Alternatively, the FT's choice the Screen of Screens provides another way to find hidden gems. Just remember to DYOR !


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Sprue Aegis plc (Sprue) is engaged in designing, selling and marketing of smoke and carbon monoxide detectors sold under the FireAngel, First Alert, BRK and Dicon brands. The Company has its own CO sensor manufacturing facility in Canada. The Company’s product include ST-620 Thermoptek smoke alarm. The Company’s operating subsidiary include Sprue Safety Products Limited, AngelEye Corporation, AngelEye Incorporated and Pace Sensors Limited. Pace Sensors Limited manufactures carbon monoxide sensors and the principal activity of Sprue Safety Products Limited is to develop and distribute fire and related safety products. more »

Share Price ()
199.5p
Change
-7.0  -3.5%
P/E (fwd)
12.0
Yield (fwd)
4.0
Mkt Cap (£m)
78.1



  Is Sprue Aegis fundamentally strong or weak? Find out More »


5 Comments on this Article show/hide all

jraitt 30th Apr '13 1 of 5
1

Ed. I bought these for - I think - 3p when they first came to market on Plus market. I held for a long time and they did nothing. I bought 3 of their products and plugged them in light sockets. Two of them went off at different times later with no apparent reason and I could not stop the noisy beep. Even unplugging them had no effect so I ended up dumping them in a neighbour's rubbish bin. I sold my shares . Rather wish I had had more patience. Sad story.

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Edward Croft 30th Apr '13 2 of 5
1

In reply to jraitt, post #1

Crikey - I've always been an advocate of the Peter Lynch ethic - that you should buy, use and test the products of companies you own shares in. I did that for RCG Holdings (LON:RCG) and had an appalling time - couldn't get back into my computer ever again ! Similarly for Globo (LON:GBO) I remain skeptical of the Go! Enterprise platform as the iPhone app is very buggy and frankly I'd never use it myself.

I have never used or tried Sprue's products - that's a terrible experience you've had there. Company PR and marketing teams are very good at selling the message of 'great design' or 'powerful brands' but there's nothing quite like the actual experience for the whole truth.

Thanks for contributing on this thread - I'd be interested to know if others have experienced Sprue Aegis' products too. Might be worth a trip to B&Q or Tesco.

Blog: Follow @edcroft on Twitter
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jraitt 30th Apr '13 3 of 5
1

In reply to Edward Croft, post #2

Ed, That was about 10 years ago - hopefully a few refinements have been made
since then.

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it_trader 1st May '13 4 of 5
1

In reply to jraitt, post #3

Absolutely gutted I had a look at buying into Sprue Aegis a few weeks back but I couldn't deal online and couldn't be bothered ringing my broker to deal and find out if I could place them in my ISA. That'll teach me and learnt a vital early investing lesson! If a company looks amazingly solid go the extra mile.

With regards to trying out the products. I bought a carbon monoxide detector a few months ago which sits in a boiler cupboard close to our babies bedroom. Hopefully I'll never have to find out if it works or not.

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Glasshalfull 18th May '13 5 of 5
3

As posted on Paulypilots daily update comment (17/05/13), but probably of more relevance here.


Sprue Aegis (SPRP)

PhilH,

Firstly, I've updated the thread header over on ADVFN to reflect the Jarden/BRK bid and Sprue Defence Document:-

http://uk.advfn.com/cmn/fbb/thread.php3?id=24324751

You will have noted from the Defence document that Sprue Aegis have received letters of intent rejecting the bid from shareholders with 52% of the equity & have intimated that they will peruse a move to AIM in the next 12 months. They have also offered to place Jarden/BRK's 27.7% shareholding with investors as part of their move to AIM,

"If BRK believes 90p represents “full and fair value” for Sprue Shares, the Independent Directors will work with BRK to place its shareholding at 90p per share"

Given the wholly inadequate and frankly embarrassing bid from Jarden/BRK I don't foresee a scenario which would see them come back with an increased offer. Having had time to consider all the facts & further detail contained in Sprue's Defence document, especially in light of the lack of investment & falling sales of BRK products, the current distribution agreement between the two companies is clearly of far more importance to Jarden/BRK.

I am now content that Sprue are responding from a position of strength. They clearly don't need the distribution agreement having assumed employees & contracts and Jarden/BRK would require to start all over again in building a European foothold if Sprue sever the link with them.

Sprue have signed significant contracts over the last 6/7 months & new products coming on stream so the forecasts for 74% earnings growth appear to have some weighting. Indeed, the following forecasts for Sprue Aegis indicate that they are on the cusp of considerable earnings growth over the next few years.

​31/12/13 - 10.8p (+74%) - £5.3m PBT (net cash forecast c.£7.6m – Dividend forecast 6.0p)
•​31/12/14 - 15.6p (+44%) - £7.6m PBT (net cash forecast c.£10.4m – Dividend forecast 8.0p)
•​31/12/15 - 21.2p (+36%) - £10.2m PBT (net cash forecast c.£14.9m – Dividend forecast 10.0p)

Add the fact that since initiating a dividend of 0.5p in 2009, they have DOUBLED it each year since. The dividends forecast over the next few years would equate to a dividend yield of 11% for year ending 2015.

Lets also not forget that they also exhibit strong cashflow and had £6.2m net cash as at 31/12/13 while only on a current market cap of £34.8m, with the cash position forecast to increase over the forthcoming period.

If they achieve as forecast the the shares will multi-bag for the current price of 90p as investors lock onto the "moat" they have within the UK in terms of retail and Fire & Rescue sales; release of new products & brands; take advantage of legislative requirements across Europe; develop sales within new long term contracts with British Gas & Baxi, all of which should lead to an accelerating earnings record coupled with progressive and meaningful dividend yield.

Essentially, Jarden/BRK have attempted to "steal" the company on the cheap rather than offering a fair price.

I've absolutely no idea if they'll dispose of their holding but I'm sure all will become clear over the next year as Sprue initiate the move to AIM and re-negotiate or serve notice on the current distribution agreement with Jarden/BRK.

Regards,
GHF

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About Edward Croft

Edward Croft

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CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »



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