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!
I added a base position in Sprue Aegis today. The company issued it’s half year figures in mid September and the price has drifted down a little since then by about 4% since that time.
What I like about the business.
Well it’s a business partly driven by legislative requirements in a number of European countries; smoke alarms and carbon monoxide alarms. Looking at the report and presentation it is clear that this year’s figures have been given a non-reoccurring boost by the legislative requirement in France. However stripping that back, it still looks like there is an attractive business moving into 2016.
Things I specifically like:
No debt and cash position of £29m (attractive against a market cap of £144m)
Good cash flow
Price to FCF 7.0
Piotroski F-Score of 7
Current Ratio 2.0
Operating Margin 14-16%
Very attractive Stockopedia stock rank score of 95, a fact which gives me some degree of reassurance with my decision to make an addition to my portfolio.
Note the above figures are from Stockopedia
In terms of the narrative looking forward:
Sprue still has a reasonable order book for France extending into early H1 2016 which provides good visibility of H2 2015 revenue. Germany's 10 year replacement market is about to recommence and two additional states with around 10m homes will require smoke alarms to be fitted by the end of 2017 which is expected to provide further significant growth opportunities in 2016 and beyond.
The implementation of full scale production of the SONA range of products before 31 December 2015 is expected to provide significant sales growth opportunities for UK Trade in 2016 based on the positive customer feedback received to date.
We are pleased that the Nano-905 is now being fitted into finished carbon monoxide detectors offering enhanced performance in 2016.
Given the adverse impact of foreign exchange rates against Sterling on sales and on gross margin compared to H1 2014, the Group is reviewing customer selling prices.
The Board reconfirms that the Company will continue to pursue its progressive dividend policy. Subject to strict hurdle criteria, the Board will seek to identify potential acquisition opportunities to strengthen the Group's strategic and market position and drive long term shareholder value.
Subject to no significant net adverse foreign exchange rate movements between Sterling and each of the Euro and the US Dollar, the Group is on track to deliver full year results in line with market expectations.
Note: as ever, this is just a log of my thoughts for making a purchase of a stock it is in no way a recommendation or tip please see disclaimer page.
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