Small Cap Value Report (18 Aug 2014) - SPRP, LID, REDT, LSI, DQE

18th Aug '14 by Paul Scott

24 comments 20811 reads

Good morning! I'm back in the UK now, so am using my normal desktop - so will be able to include graphics again. Hopefully normal service last week wasn't too disrupted by me being on the beautiful island of Paxos. It got me thinking that really I could work anywhere in the world, subject to time differences, so that's food for thought. So I might buy a better laptop, and spend a few more weeks in Paxos, who knows?! A couple of holiday snaps will be at the end of today's report, after the important stuff is out of the way.

Sprue Aegis (LON:SPRP)

Share price: 255p
No. shares: 45.5m
Market Cap: £116m

Sprue Aegis is a smoke & CO2 alarms company. It moved onto AIM on 30 Apr 2014, having stayed on the smaller ISDX market (used to be called Plus markets) for a surprisingly long time. Every now and then you can find a decent company on ISDX, and because very few investors bother looking, there can be under-priced things in there, although you often have to be very patient for anything to happen. A move to AIM is a good catalyst for unlocking the value in such under-priced situations, if management can be persuaded to do so.

Readers here should be familiar with this share, as I've covered it regularly since Jan 2013, when I first flagged it as looking "potentially cheap", and "worthy of more research" in my first ever report exclusively on Stockopedia, on 28 Jan 2013. The shares were only 66p then, so they have almost 4-bagged since then. This is a good example of the opportunities that crop up in small caps quite often, to buy into decent growth companies that are off the radar of most investors.

Shareholders will be pleased with the trading update today, which says;

On 14 July 2014, Sprue, one of Europe's leading home safety products suppliers, released a trading update for the six months ended 30 June 2014. Since that date, the Company's order book has grown considerably, largely driven by a significant increase in smoke detector orders received for the French market. As a result, the Board now expects that the Company's results for the year ending 31 December 2014 will exceed market expectations.

Clearly that is good news, although no indication is given of the scale of the…

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brryhayward

18th Aug '14

Hi Paul

I bought into SPRP some time ago, in spite of the extra costs of dealing on ISDX (one of my better decisions!).

I note that according to Stockopedia, the rise today is on lower than normal volume. Most pundits seem to regard trading volume as significant, although I'm not convinced. I'm more suspicious of market makers.
I wonder whether anyone has any thoughts on this?

By the way, I'm relatively new to Stockopedia, but I read your reports every day. Your insight is much appreciated. As indeed are other readers' comments.

Thanks
Barry

MichaelFBS

Thanks Paul. Really interesting.

nevilleaustin

Hey Paul,
Still no holiday snaps!
All the best, Neville

maillotàpoisrouges

You pushed the button didnt you Paul? Bet those 20000 are yours?

iwright7

I pushed the Sprue Aegis (LON:SPRP) button on a few, (6% of my SIPP) having done some more research this morning. The key points for me are their confirmed French sales growth, +33% year on year broker EPS forecasts which Sprue say they will exceed to Dec 14, their patented sensor technology and track record to date.

Little not to like - Ian

.

Maddox

Hi Paul,

Welcome back and very muck appreciate your reports whilst on holiday - very diligent behaviour to your readership.

What do you make of Lidco's explanation of clients 'destocking'? It's a phrase that I feel is very unsatisfactory and raises more questions that it answers.

Cheers Maddox

carla77

Paul,

Welcome back.

Keep on telling us "like it is".

Regards

Peter Barrett

Cleeve

I bought SPRP at 63p even though my broker tried to talk me out of it saying it was high risk as it was on ISDX, the problem was I could not buy many as investment rules meant I could not buy in SIPP or ISA's, surely if its ok to be on a UK market it should be ok to go into an ISA or a SIPP otherwise what does that say about ISDX. The reason I mention this as it was the first stock I found using Stockopedias filters, I put in some very tricky criteria and only 3 or 4 stocks came out and this was the one I liked most. I looked on-line and could not find any forums talking about it so liked it even more, just a dull sounding business that makes money, just what I want!

Paul Scott

Hi Peter,

Many thanks! It's worth bearing in mind also that I have always made it a principle to never accept remuneration from any company to write anything about them. So my opinion can't be bought! Hopefully that comes across in these reports - the unvarnished truth, as I see it, good or bad - even if I hold the share personally, if I think something is wrong, I'll say so.

Whereas many other commentators have commercial relationships with the companies they write about - e.g. brokers, commissioned research, PR, etc. Even private investors tend to only write bullish things about stocks they own & gloss over the negatives. Again I try to make it a point of principle not to do that, but easier said than done, hence the disclaimer at the end which makes it clear if I hold a long or short position, so that readers can make allowances for any unintentional bias.

But for me the crux is to never, ever accept any payment from a company that you write about. That to me would be effectively a bribe, and makes what you write worthless. Hence why I have always refused such offers of payment. Other people may have a different opinion, that's fine, I'm only saying what I believe & what suits me best. Independence is everything in my view.

Regards, Paul.

circuslover

Hi Paul,

Few of questions re SPRP (I am relatively new to this so apologies if they are not that pertinent)
1) To what extent should you be concerned about the differential in reported earnings and free cash flow ? particularly in recent years or is that not relevant given the growth of the company at this stage and its mostly working capital related
2) Why raise £7.2mm of equity for working capital if you have over £5mm cash and no debt?
3) when they moved to aim and did the placing at £2 they appeared to sell £4mm of stock for existing shareholders.. is that correct? and do you know who sold?

Many thanks

Hi Maddox,

Re Lidco (LON:LID) I agree with you that the "destocking" by a customer was a lame excuse. Sure that might cause a timing difference in orders, but it effectively means that previous figures were overstated, due to large one-off orders! Also it means that the customer isn't using as many as they planned, surely? (or distributor, or whatever).

Thanks for your comments re the continuity of reports whilst I was on holiday (apart from the power cut day). I enjoy writing these reports, and didn't find it much of an imposition at all to spend 2-3 hours in the morning doing a report whilst on holiday. So it's perfectly practical for me to write them all year round, and still have breaks along the way!

Cheers, Paul.

PJBY

SPRP-New patented sensors will give cost savings and higher margins going forward (SPRP are regarded as the market leaders in R and D),new Trade range launched later this year of which the Co are very positive about as they have worked on it for a number of years. Also, these products have a typical life span of 7 to 10 years, then disposed of. A repeat cycle and cycles are starting.
Also- Spain Italy must be target markets for SPRP.
I hold (heavily) pencilled in 350p target next 2 years then review.
GLA
PJ

edit=- Have AGM notes if anyone wants them.

Ramridge

Hi Paul- your principled attitude is totally commendable and I applaud it. That is why you are one of very few financial analysts I care to read attentively. Now here is a not too serious question. In your visits to companies, you often get wined and dined and given the full charm offensive treatment by senior management. You then have to write about this company. Can you honestly say that you remain totally impartial in your critique?
Regards, Ram

Funderstruck

Paul;
Thanks for your insights & welcome back. Nice photos of Loggos...I managed to get a villa there overlooking the beach...looking forward to it for mid Sept. Thanks again for your input on travel.

Hi Ramridge,

"In your visits to companies, you often get wined and dined and given the full charm offensive treatment by senior management. You then have to write about this company. Can you honestly say that you remain totally impartial in your critique?"

Good question. I never accept lavish hospitality, but in my view being given lunch & a couple of glasses of wine whilst listening to a management presentation is a fair exchange - after all, it's a 6-hour round trip for me (including the time spent in the meeting & return train travel), and I pay my own travel expenses, so being fed & watered (sandwiches or a buffet lunch are fine, but a hot meal is nicer) at the expense of the company concerned is fine I think, and doesn't cloud one's judgement at all. At least not consciously anyway - maybe it might do subconsciously? On a human level, it's certainly harder to be ruthlessly critical of management in print after having had lunch with them. Whereas if you don't know the people behind a business, it's easier to toss a grenade in their direction.

The thing that can cloud your judgement, and is something to be very mindful of whenever meeting management, is that it's difficult to criticise people you like. Hence why I try not to get too close to management, and I always try to ask one or two fairly tough questions - so that they might see me as someone who's not going to have the wool pulled over their eyes easily.

Furthermore, most investor/broker lunches are groups of up to about 20 people, so you form a view mostly from watching & listening in a crowd, rather than being an active participant. I'm not there to befriend management, so I try to keep a bit of a distance, but over time you tend to get to like the most personable management, and maybe give them the benefit of the doubt where you shouldn't perhaps?

Also, I've found that doing a write-up immediately after a meeting is a bad idea, as you tend to just regurgitate the party line. Whereas if you give yourself a few days to ponder everything & let an overall impression build in your gut, then I think better decisions & views are made.

So overall, I try very hard to be impartial, but when subjected to the full PR spiel from a company, you can sometimes be sucked into a story more than you should. Thankfully my focus these days is mainly on the figures, so if the figures don't stack up in terms of valuation, then I won't be lured in by any amount of spin.

But from thinking aloud here, I think that having lunch with management probably does skew your views on the company somewhat, even if you try to prevent that happening. Although I find that seeing the dynamic of how management are together, and just little subtleties of their body language, etc, far outweighs any possible unconscious bias that might creep in.

Furthermore, I've been to lots of presentations where I've ended up thinking that the management & the company were absolute crap! So these days, as time is limited, I only actually agree to go to lunches with companies that I already like & often already hold shares in, or am actively considering whether to buy shares in. I turn down nearly all other lunch invitations. Good points to ponder though, so thanks for asking the question!

Regards, Paul.

Hi Paul - a very frank and honest reply. Thank you.
Regards, Ram

Richard Goodwin

Deltex are a competitor of Lidco. They seem to rely more on giving machines away and managing the sale of consumables rather than sales of packages of machines and consumables. Deltex reported some time ago about the de-stocking. I suspect that Lidco's strong growthin the US is mostly the result of not really having had distributor representation there for a while so any sales through the new distributor represent growth. I found it interesting how tribal shareholders in Deltex are, they want to compare with Lidco's performance. Deltex itself says that its competitor is Edwards rather than Lidco.

Thanks Paul for your take on 'destocking'. Another possibility I suppose is that the customer is running-off the stock prior to moving to another supplier? Time will tell. Cheers Maddox P.S. very nice pictures!

Hi Richard, thanks for the insights - I particularly like the medical devices segment - did well on Axis Shield and Gyrus previously. It has an attractive business model - place the device and price up the consumables - which offers good transparency; easy to monitor and predict likely future performance. Cheers Maddox

Cisk

Richard, I'm a long standing shareholder of Deltex (must be nearly 10 years now!) and should have thrown the baby out with the bathwater years ago... although I've reduced my stake somewhat this year.

They've been an awful investment so far. They mentioned the destocking by the NHS a while ago; however US sales are now slowly starting to pick up.

It's a weird situation - the product has an overwhelming body of medical evidence to support its effectiveness in saving lives and saving money, but trying to get the NHS spending (even when NICE guidelines support and recommend its use) is next to impossible.

They've been trying to crack the US market for years, perversely they now seem to be making progress and have been successful in signing up a number of US hospitals, just as the share price tests new lows.

Deltex have made rumblings about being cash positive more times than I've sold a share and then seen it motor in price, i.e. quite a lot. However they do seem to be at a tipping point - any sustained success I'm sure will see the share price breach all time highs (I think that might have been around 30p v. current price around 8.5p).

I know of the rivalry of some BB posters between the two companies; personally I don't know Lidco other than some see them as competitors to Deltex, so cannot comment about them, only that I like the medical device / diagnostic industry, and in line with many small caps, shares in similar companies have been hit hard (e.g. Avacta, EKF Diagnostics etc). And I'm sure there's enough pie to be shared between them for them both to be very profitable (eventually).

PS - Paul, great to see your holiday pics - hope you managed to relax a little and not check stocks too much.

Small Cap Value Report (18 Aug 2014) - SPRP, LID, REDT, LSI, DQE

Sprue Aegis (LON:SPRP)

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Paul Scott

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