Sprue Aegis provide a trading update today, 18th April 2016, that did come as a bit of a surprise and to be honest, it just left me feeling very uncomfortable about the company.
Firstly the battery defect whilst probably not life threatening in terms of the functioning of an alarm, to my mind it could seriously dent confidence in the products from SPRP. If SPRP deal very professionally with the rectifying the problem, then given time, reputation should recover. There is a certain amount of forgiveness in the market once a company identifies an issue and then applies first class customer care: we will have to see. I am not overly impressed with the “third party supplier” handle as the batteries in SPRP product; it’s down to them to make sure the components used are fit for purpose.
The trading statement then goes on to say:
Challenging trading conditions in France, principally due to overstocking, and weaker sales in Germany, due to product certification delays, are likely to significantly adversely impact the Group's expected results for this year. Consequently, the Board has revised its guidance for the full year 2016. Subject to no major changes in exchange rates, the Board now expects a first half operating loss* of approximately £1.9m (which includes a restructuring charge of £0.2m as a result of reducing certain fixed overheads), and an operating profit* in the second half of approximately £3.8m with sales and operating profit* in the full year of approximately £55.0m and £1.9m respectively. The estimated saving in 2017 from the fixed cost reduction is approximately £0.8m.
Graham Whitworth, Executive Chairman of Sprue, said: "Unfortunately, overstocking in France and weaker sales into Germany, have resulted in us issuing revised guidance for this year. We expect to rebuild trading momentum in the second half of 2016 with certified new products and enter 2017 with normal levels of trading.
In my view, that does raise a question regarding management really having their finger on the pulse in terms of both their suppliers and their customers. So putting all of that together shortly after the RNS came out, I decided to sell the relatively small holding I have/had, about 1.5% of the portfolio. It’s fairly standard for me to sell on a profits warning and I managed to get a sell away with iWEB on an at best deal first thing this morning. Also swiftly looking at projections, and my criteria for investing, the case for continued ownership based on my investment principals’ was destroyed. After this morning fall, we now have a business with a market cap of around £65m, a projected operating profit, from the RNS, of £1.9m. At the time of writing the SP had fallen to about 155p; just my opinion but I feel it could have further to fall on what I see as overall confidence issues and revised valuation.
I don’t normally like dealing blind like that and fully expected to see a sale price in the order of 130-140p; I was very happy to see that I actually got 185p.
This sort of thing can happen with relatively small companies especially ones on AIM; it comes with the territory, so no moaning from me. So it's onto the wood-burner for SPRP, although hopefully without too much smoke as I can just hear a low battery bleeping!
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