LON:FA. | Sprue Aegis - No Smoke Without Fire!

20th Apr '18 by Dearg Doom

3 comments 2348 reads

Sprue Aegis (LON:SPRP)

Share Price 112.75p (-9.5%)

Bid/Offer 111.5p/114p (current live dealing spreads)

Market Capitalisation £56.4m No of Shares 45.9m

Enterprise Value £46.5m NMS 1,500

About the Company

A company focused on providing market leading smoke detectors, carbon monoxide detectors and other home safety products, serving international markets. Major brands include AngelEye, FireAngel and Sona brands.

BRK/SPRUE Dispute

Normal practice was simply for Sprue Aegis to return any unsold stock worth £4.3 million gross value to BRK at the end of the contract period. However, BRK pulled a rabbit out of the hat, claiming breach of contract just 8 days before the contract was due to terminate and a few days just before Sprue's final results were to be released.

A large adjustment to full-year profits would be needed if BRK's claim of trade infringement was successful. The value amount for the trade infringement is very small in value terms, but more importantly it gets BRK out of having to take back millions of pounds in unsold stock under their distrubitive agreement.

Sprue decided to delay the release of their final results in order to sort out the matter. At the time, looked to be the correct course of action, but unfortunately the dispute has dragged on.

In worse case scenario, Sprue is free to do what they wish with BRK products and could threaten to flood BRK's local markets. This could be done by placing stock on supermarkets shelves at discounted prices for months on end. A rather messy way but would allow Sprue to retrieve as much as possible of the £4.3 million of stock held.

For BRK this would in hindsight be a pyrrhic victory at a long-term cost to their brand. There is no win-lose situation here, only win-win or lose-lose. Sense on both sides should prevail in time.

This spat is a falling out on a partnership going back years that should have ended up with Sprue being acquired at a takeover premium by BRK in 2013. BRK was unwilling to pay up then and apparently not now either as BRK looks to thwart Sprue's new independence.

If my analysis is correct, the risk/reward for Sprue shareholders is immense with…

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NeilS

20th Apr '18

Very interesting, thank you!
My thoughts throughout this week have been:
I struggle to imagine how there could possibly be £4.3m of stock “in the system” anyway based on sensible stocking turnover and working capital management, particularly as this is just part of Sprue’s business. So I agree -brinkmanship on the part of BRK. It seems too high a stock value.
My biggest fear is that Newell Rubbermaid are using this as an opportunity to weaken Sprue prior to entering the uk with these same products though one of their existing operations thus creating a major competitor and destroying the profit in this niche.
What do you reckon?

Dearg Doom

Hi Neil,

The stock valuation is correct, but the standard method of returning the goods at the contract end back to BRK for full refund is in dispute. Without the normal refund understanding in place, Sprue would have run down the BRK stocks in the months beforehand. BRK has played hardball with the Distribution Agreement in an effort to bully Sprue Aegis and weaken Sprue as a competitor.

BRK takeover bid for Sprue at 90p in 2013 was way too low. The real value of Sprue was more than 90p at that time, as it is now at 112p almost five years later.

Regards

@MyDeargDoom

Splode

25th Apr '18

An interesting and fair review of Sprue's current woes by DD, I agree.

We owned this stock when it was benefiting so much from new regulations in France followed (hopefully) by Germany. We quit when the French deadline expired and the German opportunity did not seem to be coming through. Spue's Finals in April 2015 and 16 were greeted with instant SP collapses to finish the day down 12% and 54%, but 2017 results (Rev -36%, PBT -73%, dEPS -68%) gave a relief-bounce to the SP of 6% after dropping the previous month in anticipation of worse.

I agree the opportunity in the space is good but the management of this enterprise seem to have way too much misfortune for us to back them again, even at the current price when there are so many less risky stocks in the markets. However, Stocko likes Sprue a this point assigning it Q89 and V87 and, despite M31, R is 84.

Sprue Aegis - No Smoke without Fire!

Sprue Aegis (LON:SPRP)

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Dearg Doom

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