LON:FA. | Sprue Aegis - Down But Fire Not Out Yet!

19th Apr '16 by Dearg Doom

43 comments 18460 reads

Closing Price 123.60p Down 54% on profit warning

Market Cap £57 million

Profit Warning

Lots of disappointment in Sprue Aegis (LON:SPRP) yesterday. A growth share that has gone not ex growth but negative growth. The share price has collapsed. The share price may continue falling tomorrow if one of the institutional shareholder throws in the towel. There must be plenty of small investors caught out badly today in what had previously been a good story.

I can't resist however the falling knife. I had to buy a few Sprue Aegis (LON:SPRP) near close of business under 125p. I was never was interested in the share previously due to Sprue Aegis apparent full valuation. Today that has changed somewhat, if I presume the company has stumbled the one time only.

I do realise the company won't get the higher market p/e rating again. It takes time to be fully forgiven by the market. Give it 12 months.

Most disturbing to my investment thesis is the projected trading loss in the first half of next year will be £1.9 million. The back to profit story of £1.9 million profit by the full year does suggest a good turnaround of £3.8 million in the 2nd half.

Some positive points to consider

The company has in the past under promised and then surprised on the upside. Maybe the profit forecast by the company may be better.
The £5.5 million set aside for battery failure seems excessive. In general 10 year battery life claims by companies for fire alarms seems to be a general problem across the industry.
The eventual bounce back in profits might be facilitated by the German market in which progress is delayed at the moment. However it is claimed the Germans buy 5 or 6 alarms per household rather then the French who seem to buy one only. Better again the Germans buy the most expensive alarms with better margins.
Entry into the Polish market is a possibility but an unlikely immediate catalyst for change. Lots of small competitors there, but possibly price sensitive to superior products.
A possible takeover bid by the largest shareholder who offered 90p in the past which was rejected strongly. Now might be…

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Rusty2

26th Apr '16

Seems quite risky to me, what about BREXIT?

Dearg Doom

RE: Spruce Aegis – Foreign Currency Risk.

Unless bookmakers show betting odds in favour of leaving than I choose to ignore the risk at the moment.

I not sure whether sterling actually goes up or down regardless of the vote. Certainly volatile movements with swings both ways, but ultimately not too far from where it is now. FX traders must be licking their lips at the prospect!

Brexit does not take place until 2 years after a “Leave Vote” so nothing immediately to worry about with any certainty. Sprue Aegis prospects will certainly be more clearer at that stage.

As what happen in Ireland on a few referrendums, if you don’t get the vote you want, the Government has time to get people to vote again on some similar referendum that avoids Brexit.

Regarding Spruce Aegis I do note that foreign exchange risk has been somewhat dealt with the supplier on a supposed shared risk basis. This is for the Stg/US dollar rate. Firms can and do hedge risk. Stg/Euro can be the other hedge Sprue Aegis might do out of prudence. A likely question for Q & A tomorrow night at ShareSoc.

Please feel free to throw out any list of shares worth researching which anyone feels has equally good or better prospects than Sprue Aegis.

Have a look at Next (LON:NXT), Waterman (LON:WTM) and Boohoo.Com (LON:BOO).

St. Modwen Properties (LON:SMP).?

Hi Herbie,

Thank you for the three stocks suggestions. Nice choices.

Next too large a capitalisation for me maybe, and possibly ex-growth. Still good steady stock.

Waterman good value but cyclical but possibly the most interesting of the three stocks mentioned. Own it previously, normally good for 10% increase. Would buy again on a bad day for the stock.

Boohoo.Com. too high a p/e. Price may go up, but priced to perfection. Downside scares me on sector pullback or general stock market decline. Own it previously, but sold much of the upside since shown.

One I can recommend to you to research would be Bank of Georgia. It has a UK listing and currently my largest position.

I can't find Bank of Georgia? There is a bond. Anyway its not for me, only needs Russia to invade again, its not an area I would be looking to invest in.

Boohoo p/e may look high but compared to ASOS (LON:ASC) who are its nearest rival it looks reasonable. PEG is not excessive but yes its priced for growth.

Waterman (LON:WTM) has had a few bad days recently, its up about 5% today.

Sprue Aegis Price Share Price £1.26 on 26/4/16

(Spread £1.25 - £1.27) Final Closing Installment of 7 Day Diary

(Should be read in conjunction with original article, and post 17, 20, 22, 23. time permitting)

7:00 p.m. Market Close

Disappointing close to end of trading day. No movement despite 800K shares sold. Still a large block seller in the way of share price appreciation. Three block sales totaling 350K shares in 3 trades shows why the quantity of small purchases by individual shareholders are not moving the share price upwards. Really like to see it above £1.40 to give comfort to my thought processes.

Bought three times today in the opposite direction to the determined seller. Twice in the morning and last trade completed three minutes before close.

Overall a good day, another chance to pick up stock at depressed prices. Presentations to brokers with reports out tomorrow hopefully with informed forecasts couple with informational evenings being done. The company should show they are eager to put out a positive spin on recent events and a positive outlook. Wish I could see the webcast.

Big trading question of mine is when does the big seller stop. Very active last five days. The seller has been happy to date to hold the line and offer stock in 125 - 130 range. If the purchasers dry up, will the seller look to a new level 110 - 120 as a disposal point.

Sold today some stocks Bonmarche and Finsbury. Profits on one helping with the small loss on the other. Chance to re-load and find another stock worthy of interest. Suggestions much appreciated.

My favourite stock for readers is BGEO Bank of Georgia. and is listed in the financial times. Largest bank, insurance, and hospital provider in the country with excellent margins in a growing economy with positive demographics. Low comparable p/e to boot. Pays a good dividend.

Major concerns for many would be currency volatility to earnings and possible bad debts.This is the same for all banks normally. The shares have gone from £8 to £24 and back down to £16 and now back to £22 over last few years.

The odds of Russia invading Georgia I would put at 100 - 1 or more. The country is very entrepreneurial and it is a stock I have held for may years. If I do trade the share it is normally to add to my holding. DYOR

Really enjoyed doing the diary. it is finished now, I would like to see other people having a go.

I think 100-1 odds are a bit steep. They were there in 2008?

Also it seems they are some border tensions: http://www.aljazeera.com/indepth/opinion/2015/07/creeping-russian-border-georgia-south-ossetia-abkhazia-150722111452829.html

Re: Bank of Georgia (BGEO)

Yes you might be right regarding the odds, but I do need to sleep soundly at night!

Georgia is a stable and more European state in its outlook and looks west for its influences. It would indeed be a good candidate for EU membership. I think however that while a piece of its territory is in dispute(with Russia) this cannot happen. Same applies to Ukraine disputed territory. I am not a student of politics however.

Russia's recent expansion/aggression appears to have succeeded at face value but at a huge cost to the Russian economy. Possible motive was home consumption for popular support back home in Russia and as a distraction from home economic woes. There is nothing more Russia can politically or economically gain in this sort of aggression.

Even if worse came to worse, Georgian banks, insurance companies and hospitals would still need to operate. Bank of Georgia is the biggest operator in each of these areas in the country. Private property would still be respected. I do not think Russia has a problem with capitalism nowadays. I don't worry if the unimaginable happen that property would be confiscated and companies nationalised. Hence the extended odds I offered. Maybe 40 to 1 on reflection may be more appropriate. Sleeping tablet tonight methinks!

Regards

27th Apr '16

As you seem to know about Georgia , do you hold Georgia Healthcare (LON:GHG).?

Georgia Healthcare plc (LON:GHG) Versus Bank of Georgia plc (LON:BGEO)

Bank of Georgia plc sold circa one third of Georgia Healthcare plc in a UK listing about 6 months ago at £1.70. Price now £1.95. Health care is a growing business in any country but the recent introduction of universal health care system in Georgia means health care demand is on the increase naturally. Georgia Healthcare plc is the largest hospital provider in the country. They also do medical insurance. There must be opportunities for Georgia Healthcare plc to take out smaller hospital players in that country with cash now in the balance sheet and ability to gear up.

Bank of Georgia(LON:BGEO) took advantage of market interest in an array of health groups listed at that time in London. Their timing however was bit too late in Oct '15 and they had to accept a 30% lower price than they had hoped to achieve. I reckon they still sold the 1/3 shareholding for the price they paid for the whole company, which they had put together a few years earlier. Nevertheless they now they have a free ride on two thirds.

As regarding an investment in Georgia Healthcare plc, it is probably a much better stock than the many other blue sky stocks that get undue attention on many bulletin boards without merit only to see the game up a year or two later.

Back to the original question. Bank of Georgia plc is my preferred choice of the two because it is a safer but slower overall diversified company with other investments in real estate and utilities. It is my conviction stock!

Dearg Doom.

30th Jun '16

A Trading update today from Sprue Aegis (LON:SPRP)

The first half loss will be a little less than the 1.9 million forecasted. Let's make it 1.6 million loss. A better second half forecast up from 3.8 million to 4.7 million if we follow the trend line.

To help along the profit recovery road, the company has received further product certification for its two European products containing a Panasonic battery. The Group expects to commence shipment of the products, namely the ST622 and the ST630, into Germany in the second half of 2016 as planned.

Share prices are often price on a rolling 12 months earnings forecast. If management is working hard and if sales figures continue to improve, then 2017 improved earnings are not priced in currently.

The claim against a third party Chinese battery manufacturer on a warranty claim seems to have been hardly financially worthwhile. But at least it is out of the way and removes an uncertainty. The claim is only worth 100K which is small compared to the exceptional charge taken by Sprue Aegis.

Trading volume this morning in the shares is minimal. Has not stopped the market makers raising the bid/offer price. The market makers at the very least think others will see this update as good news.

A conviction stock for me.

Any mention about Brexit on their trade, it must be a concern with their EU exposure? Also with fall in £ their costs have just gone up again.

Jeremy Rea

"The claim is only worth 100K which is small compared to the exceptional charge taken by Sprue Aegis. "

My thoughts exactly. The figure is a lot less than I had expected.

At face value, the foreign exchange sharing risk arrangement previously announced with suppliers seems to alleviate some FX issues. Maybe I am wrong!

Have a look at my thread reply no. 27. It is dated the 26th April 2016 when the world looked so differently. I covered a few topics including Sprue Aegis's foreign exchange risk.

Sorry, it was reply no. 25. and not reply no. 27 regarding your Sprue Aegis FX query.

As previously observed £SPRY purchases are in small volumes and sellers appear to sell in large blocks. Some large shareholder is certainly more than happy to take the money now and not wait for European growth.

I see so it could be a win/win for them, hedged for costs in China but then benefitting from £/Euro /US$s rate of exchange on sales.

Not sure if they will be any problems with trading in the EU still, have to wait and see on that.

andrewjames

We were told at the ShareSoc meeting a couple of months ago that the battery cost is only a relatively small cost of the sealed unit. However, the impact of the faulty battery is massive, as we have seen. The consequence is that warranty cover is related to the battery component alone and so was never going to remotely cover the consequential losses involved.

A large part of the solution is to upgrade the monitoring procedures. It seems that SPRP has decided to keep faith with the Chinese supplier, rather than switch to the (more expensive) German solution. As a shareholder, I sincerely hope that they have called this correctly.

19th Sep '16

Initial casual reading of the half year trading results scared shareholders. Better to sell and read later. Market makers more usual of late are quoting electronic prices, but investors are finding it difficult to sell at the bid price even in small amounts. In any case, the share price seems to have settled with a two-way market at 140p - 145p.

Reasons to worry this morning included

The large permanent drop in revenue of £33 million in France was expected but still a shock. Most French households having been obliged by law to obtain a fire alarm have done so at this stage.
The fall in German sales also raised some sweat above the eyebrows.
The 7 million payment of additional stock kept to avoid stock supply disruption from China which would have been expected to have been sold still lies mostly unsold.
Trading being in line or marginally in line is not good enough these days. Always good nowadays for a 7 - 10% knock down in the share price. Obviously conditions must not be as good as I had hoped as I would have thought the company would surprise on the upside.

Reasons to be cheerful

The price for the last few weeks had been stuck in the 160p - 165p range which seemed to be the fair value point for the stock. Today's drop for no apparent reason provides another opportunity to buy a better than average stock with cash in bank, paying a dividend and delivering on what it says. I would expect the stock to retrace back up to 155p - 160p level over next few weeks.
The recent software acquisition is small but necessary to keep product range up to consumer future demands.
Growth in sales in UK and other markets. German sales indicated to get back lost sales in final half of year. The 7 million of stock lying idle should be sold or at least substantially reduced.

Having taken some profits over the summer on some of my holdings in this company gave me extra confidence to acquire some additional shares. Better again I was able to add back to my holding well within the spread price quoted.

24th Jan '17

24 January 2017

Share Price 172.4p (Down today 3.5p - 2%)

Market Cap £93.3 million Enterprise Value £76.3 million

Bid/Offer 170p – 175p Normal Market Size 1,500 shares

About the Company

Sprue's principal products are smoke alarms, CO alarms and accessories and the Group has an extensive portfolio of patented intellectual property in Europe, the US and other selected territories. Products are sold under the leading brands of FireAngel, AngelEye, SONA, Pace Sensors, FireAngel Pro and Wi-Safe Connect.

Sprue is also the exclusive European distributor for BRK Brands Europe Limited, (a subsidiary of Newell Brands) selling BRK, Dicon and First Alert branded home safety products.

Trading Statement

Released today for year ended 31 December 2016. The full year end results are expected in late March 2017. The company delivered on expectations turning the first half operating loss of .9 million into a second half profit of 3 million. This gave a net profit for the year of approx. £2.1 million.

2016 sales are expected to be approximately £57.1m (2015: £88.3m). The reduction in sales was mainly down to the French market.

More promising the German market recovered strongly in 2016, up 52% on 2015. The big driver of sales was the launch of new FireAngel products in H2 2016. Smoke alarmregulation is being phased in across Germany, so the country provides plenty of potential sales over next few years. I do recall Germans tend to buy 4-5 alarms per house where the French may buy one or none, and hence the over supply of stock to date.

What I did not see last year coming was the large effect due to unfavourable currency movements due to sourcing products with dollar pricing which was only partially offset by the strength of the Euro against Sterling. Without this event the company would have delivered above its expected outcome by a margin.

The debacle over the battery failure seems to be over. The company seems not to have suffered much reputational risk.

The high 2015 stock levels (£15.6 million) should be lower at this stage.. They have remained stubbornly higher at 13.3 million currently, because of lack of demand in France. Overall the stock levels were reduced by 15%. There was also an increase in the stock provision by £0.5m to £0.7m (31 December 2015: £0.2m),

The Company's balance sheet remains strong with £14.3m of cash at the year end (2015: £22.4m) and no debt (2015: £nil).

Profit Forecasts

The company suggest circa £2.1 million profit for this year. I would hope to see circa 6.5 million pre-tax for year ending 31/12/17. Forecasts will be updated shortly. Dividend could be raised to 9p per share giving an attractive dividend yield. The company also has the option buy back its own stock with its own cash.

Final Comment

Meanwhile, I am happy to continue holding the stock, given its cash in the bank, its relatively innovative products, and the positive regulatory environment. The German market will be the key over next two years. Hopefully other foreign markets will open up due to similar regulatory changes.

The many issues holding back the company are now very much in the rear view mirror. The company seems back on track regarding the battery fiasco. The current high stock inventory is being reduced, and the recent adverse currency fluctuations may always reverse in time in their favour.

Takeover target, who knows?

Sprue Aegis - Down But Fire Not out Yet!

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Dearg Doom

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Sprue Aegis (LON:SPRP)

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