Sprue Aegis Share Discussion Threads

[cockerhoop] 06/6/2017 13:47

Getting rid of their 10 year 'cough cough' surplus stock :-)

[the big fella] 25/5/2017 18:35

Thanks GHF as always

[glasshalfull] 25/5/2017 17:48

Couple of snippets to update the thread with.

Firstly the 2016 Annual Report is now available to view online. Link below.



The first 7-pages highlight their technology innovation and recent re-branding.

Secondly, Stockdale reiterated their buy recommendation & 250p price target today, sighting favourable currency moves (at long last ;-) which may benefit the company.

"We view the recent share price weakness as a buying opportunity. Since the 2016 results were reported last month currency movements (pound strengthening against the US dollar and weakening versus the euro) have been favourable and would provide a tailwind to forecasts if sustained.

Sprue remains well-positioned to improve sales in Germany in 2017 and benefit from the ending of its agreements with Newell in March 2018. With the strong balance sheet and a 5% dividend yield, we reiterate our 250p TP and Buy rating."

They reiterate previous forecasts that indicate +65% EPS growth this year (to 9.1p EPS) & a 1p increase in the dividend in each of the next 3-years...9p dividend for 2017 rising to 11p in 2019.

Hope this assists.

Kind regards,
GHF

[wobaguk] 24/5/2017 21:05

Well i got in today on a 2.8% drop before it became double that. Fingers crossed this isnt anything that will trouble my stop loss.

[fozzie] 24/5/2017 17:49

Slightly disturbing fall from c215 to todays 180, very expensive for me and others here i expect. I hope this isn't another case of someone knowing something i don't.

[gnnmartin] 22/5/2017 09:02

The weak dollar & strong euro is a bit of a negative as SPRP switch production from America to Europe.

[the big fella] 19/5/2017 10:22

I haven't looked in here for a while and missed GHF's superb post 1527 above. Anyone thinking as I am that this is falling to the lower end of the rising channel should take the time to read the post again. It sums up the investment case superbly. It is also worth highlighting Sprue go ex next month for 5.5p div, which makes a prospective 13 month yield of approaching 8%.

[leading] 24/4/2017 09:12

GHF, Many thanks for responding to my comments in such detail and sharing your in depth knowledge of the company so generously.

All users of the Board will have benefited.

[glaws2] 24/4/2017 06:58

Excellent post GHF

[blueeyes13] 24/4/2017 03:22

GHFThank you for your detailed overview and for replying to Leading's questions. It has definitely helped clarify a few things for me too.Very much appreciated. BE

[fozzie] 23/4/2017 22:33

Brilliant post GHF

[cockerhoop] 23/4/2017 21:59

GHF,

Excellent piece of work!

Do you have any views on Sprue replacing the BRK products with those from the far eastern manufacturer? I imagine it's to fill holes in their own in-house product range but it seems to put them in a slightly conflicted position (admittedly as they were with BRK) of preferring to sell their own in-house designed product whilst being a distributor of another companies range.

[steve3sandal] 23/4/2017 12:57

Great review GHF, thank you for your opinion.

[bigbigdave] 23/4/2017 10:48

As usual with GHF why use 3 or 4 words when a few thousand will do, reminds me of the wife!

Sterling work :o)

[kinkell] 23/4/2017 10:21

Many thanks GHF for the most comprehensive report on a single company I have ever read by a co-investor on a bb.

[masurenguy] 23/4/2017 09:47

Congratulations GHF - a real tour de force dissertation on Sprue !

[glasshalfull] 23/4/2017 09:02

SPRP

What doesn't kill you makes you stronger

Sprue suffered a tumultuous 2016. They were impacted at the beginning of 2016 when Newall altered their supply terms and the subsequent sterling depreciation impact of moving from a fixed supply of products priced at $1.62 to a different metric that resulted in an significant increase in product costs.

Then came the triple-whammy profit warning that included an update on a premature low-battery signal in a number of their smoke alarms which resulted in Sprue making a £6.8m warranty provision & adopting Panasonic batteries. We also had a dramatic fall in French sales that followed on from the one-off legislative benefit & spike in sales in 2015. As well as French weakness, H1 2016 was also impacted by Germany sales due to product certification delays as they moved over to the Panasonic batteries.

Background to my investment

This was a far cry from their excellent track record of revenue and profit growth in previous year. Between 2006-2012 revenues grew at a compound annual growth rate (CAGR) rate of 49%, with PBT growing at a CAGR of 33% between 2007-2012.

Sure, investors experienced a bumpy ride in 2012 as the company were hit with a few issues (currency impact and legacy warranty claim) which resulted in Jarden (now known as Newall) making an opportunistic bid of 90p for the company that I and many other investors helped the company rebuff. Jarden /Newall only received 1.26% acceptance in the end! Yes, 1% ... the decimal point is not in the wrong place.

Sprue moved to AIM in the wake of this & then came the significant share price appreciation during 2014/15 as the company delivered 60% EPS growth in both 2013 & 2014, & the market finally woke up to the massive opportunity in France which many of us had known for years & which the company duly delivered on.

The share price rose from 15p to 355p in a period of 8 years.

Shares fall back to earth....

After these highs & then 2015's "ahead of profit" announcements on 3 occasions, 2016 proved to be a massive disappointment as previously documented with over 65% wiped off its value from high point in 2015 to low of 2016.

I've reiterated my belief in the company for over a decade now & a search of this bulletin board at the top of the investment thread will provide details of my posts & rationale on an investment here. Goodness knows I've written enough on the company through the years!

I'd like to think that I don't suffer confirmation bias in relation to Sprue...although that's open to interpretation (I can hear a few of you chuckle ;-)
I mentioned yesterday that ALL considered posts are welcome, irrespective of whether it's a holder, lurker or knocker of a company. Helps evaluation of an investment case. Sure most investors would agree.

Notwithstanding the share price falling considerably last year, I and many other investors have been richly rewarded with our original investments appreciating significantly. In my case from an initial c.20p purchase price and where we have enjoyed the impressive dividend payments that ramped up significantly over the years.

An investor always requires to reassess ones investments. A year ago, on 18th April 2016, £100m or 54% was wiped off the share price. I like many others took a significant hit. At the time I had a fairly concentrated portfolio & as Sprue was my largest holding this was quite a setback...on paper.

I speculated at the time (on this investment thread) that an EV of £34m appeared low given their track record &, while acknowledging that they had a number of hurdles to overcome, I felt confident in the ability of management & staff to turn this round. So while I may have "cut 'n run" in many other circumstance, my respect & belief in management & the investment case actually found me adding considerably to my holding. What did I say about confirmation bias???!!!

As mentioned, I continually reassess all my investments, and Sprue is no different. I have spoken with the company on numerous occasions following the 2016 triple profit-warning. While acknowledging that a number of events were outwith their control, mistakes were made. Hindsight is a wonderful thing. There are plenty of armchair CEO's on the bulletin boards!!!

Looking back, I believe that events have galvanised management & staff and sense that they are out to prove the doubters wrong.

Time of course will tell if this proves to be the case, but their H2 2016 performance and solid start to 2017 augur well. They have developed an "underpromise, overdeliver" mentality and I believe that Sprue's move to a product & service offering will ultimately find them increasing both turnover & margin...and this will translate into growing earnings while the market may afford it a higher multiple at the same time.

If they can deliver recurring revenues via the Home Connected rollout then I'm sure they will eventually command a higher valuation metric.

Essentially over the next 12/36 months I'm hoping for a double whammy of,

Higher multiple (High PER) x (Growing) EPS = Materially higher share price

Fears & Assumptions

Now onto Leadings fears & assumptions that were articulated well in post 1521 & reason for my latest update on the company.

I've reproduced each point in turn with my own comment/view below. Remember these are my own views, nothing more....and please.... DYOR!

Here goes.

- - - -
The company doesn't seem to be in charge of its own destiny. It relies on increasing government regulation to drive sales, rather than the merits of its own products, which is a weak position to be in.
- - - -

Yes, there are many legislative drivers in play across the UK & Europe and the undoubted increased legislative requirements have driven sales for the company through the years. Look at France in 2015.

This is only partly true though.

Unfortunately the other drivers of sales are when the media reports on lives lost through fires or CO poisoning that ultimately could have been saved through the purchase & installation of a smoke or CO alarm.

I think Sprue would argue that they are involved in numerous promotional activities & campaigns to drive awareness of the benefits of smoke & CO alarms. Project Shout is a case in point, as they drove increased sales of CO alarms from a very low base through raising awareness of the dangers. The success of this campaign in the U.K. has led them to support similar style campaigns in other European markets with further planned this year.

Worth reminding that Sprue enjoy being the largest supplier in 4 markets (EMEA / U.K. Retail / U.K. Fire & Rescue and U.K. Utilities & Leisure) & are attempting to increase their share of the U.K. Trade through development of their SONA range over last few years.

Recent results also reported that they had launched their products into Poland.

I'd say they enjoy a recurring revenue of sort, where their installed base require to replace their smoke and CO alarms at end of battery life (10 year replacement cycle) & also the retrofit opportunities in the large German market that I've mentioned on numerous occasions (see post 1318).

Extract:-

"North Rhine is required to ensure mandatory retrofitting of smoke alarms in all residences by 31.12.2016. This is the largest German State with 22% of the entire population (18m) & the difference here in comparison to France is the requirement for an alarm in EACH bedroom of a property alongside an alarm in all children's rooms. Also a requirement to install an alarm in the hallway of each property. Whereas, in France the requirement is only for 1 alarm per floor (think this translates to 1.6 alarms per property).

Alongside the legislative requirement for North Rhine, we have Bavaria (12m residents) with a legislative requirement in similar terms by 31.12.2017. So, 30 million residents (37% of the German population) encompassing 10 million homes...with the 10m homes estimated to require 3/4 alarms per household over the next couple of years.

Therefore, this provides an expectation for double or triple the amount of smoke alarms per property in comparison to that experienced in France.

So, I don't think they are in a weak position although legislative drivers clearly help. I also don't think the legislation in place is going to disappear anytime soon for relatively inexpensive products that save lives.

- - - -
The internet of things obviously offers opportunities, which it is trying to address, but there are others with deep pockets playing here.
- - - -

Can't argue with that!

Sprue have been developing products and software for a couple of years now with sales of connected home products underway in the UK and Germany.

They have however now made first sales & as the 2016 result announcement mentioned, this enables customers to remotely monitor their connected devices from a smartphone, tablet or inter-operate with other products/devices. This extends Sprue's core offering and opens up the potential for them to sell both products AND services which they hope will deliver recurring revenues in the future.

I've mentioned previously on this thread some of the instances where I foresee this developing ...go back to Nov 2014 and post 947 for the section I wrote on "Home Connected Trial" with my initial thoughts.

Extract: -

Sprue's Wi-Safe 2 wireless technology enables two-way communication between alarms and other wireless devices. Potential applications for Wi-Safe 2 are likely to increase due to the requirement to provide solutions to the assisted care segment of the market which is ever increasing. It's far more cost effective providing technology to monitor a persons wellbeing than provide increased provision through home visits. I would also envisage the opportunity where their technology could also act as a barometer in cases where persons suffering from a particular healthcare issue may start to show signs of degeneration or regression e.g. Dementia sufferers could significantly benefit through improved reporting of alarm/sensor activation of a "near miss" incident, such as burning toast leading to an alarm activation & developing trend or regression becoming apparent at an early stage.

Sprue's Wi-Safe 2 technology allows up to 50 alarms to be inter-linked in a single meshed wireless network meaning that, if any alarm in this network is triggered, all other linked alarms will sound. This would therefore provide an earlier & wider warning of a fire. It can also be linked to other compatible devices such as Sprue's strobe & vibrating pads.

I'd imagine that now Sprue have launched "FireAngel Wi-Safe Connect" in Germany & the U.K. we'll learn further about market opportunities/customers as this develops, such as the snippet below highlighting Sprue's recent engagement with Fire & Rescue over assisted living technology for fire safety.



- - - -
The change in distribution appears to have been driven by Newell/BRK rather than by Sprue.
- - - -

I've posted a detailed update on this fairly recently (post 1512).

In summary, I don't believe this to be the case following discussion with the company, but rather a mutual decision. A number of investors have highlighted the fact that Newall terminated rather than Sprue. Again, I have spoken with Sprue at length on this, and they presented to a number of investors during recent weeks, highlighting this as a non-issue. The fact that Sprue announced a partnership with Flex on the same day as the termination RNS should confirm this to be the case, as both Flex and Sprue would have undertaken considerable due diligence prior to signing any agreement.

Remember, after deducting Newall's DA distribution fee, this resulted in NIL gross profit to Sprue in 2016 versus £4.6m gross profit the previous year. In other words, Newall's lack of investment in the BRK brands mean that the DA was no longer profitable to Sprue & had run its course. All IMHO.

- - - -
The change in distribution arrangements is probably positive for the company in the very long term, but in the short to medium term gives rise to various problems. The first is what to do about Newell stock. A provision will no doubt be required, but how large will it be? Stock levels are anyway too high by the company's own admission.
- - - -

Again, having spoken at length with the company, I understand that no provisioning is required. I'd envisage that any of Newall's stock will simply cede to Newall on 31.03.2018. It's not as if Sprue can sell any BFK, First Alert or Dicon products after this date, although I'm sure this will be discussed between both companies amongst many other aspects to ensure an orderly transition.

In my discussion with Sprue, they mentioned that they are comfortable that stock levels will return to historic levels. Again, it should be remembered that the Newall / CICAM move precipitated the significant increase in stock levels & that this further impacted Sprue as French demand dropped off significantly around the same time as they were preparing the buffer stock.

Yes, stock levels are too high, but I'm hopeful that future announcements by the company will confirm that stock levels are returning to normal.

- - - -
Secondly, there are operational risks in bedding in the new manufacturing arrangements.
- - - -

Agreed....but they have announced the move 12 months prior to it occurring. Remember that Flex are the 2nd largest global electronic manufacturer & I'm sure experienced in managing transitions such as this. The Sprue team are very comfortable with the 12 month timescale for the transition of manufacturing and supply & I'm sure both teams will be working productively to ensure its success.

The Flex plant in Tczew, Poland already has the requisite accreditation. It's closer to Sprues end-market and especially their large customer base in Germany. Also, now far easier for Sprue's team to visit than travelling all the way to China.

The agreement with Flex also open up opportunities for Sprue, "to expand its addressable market".

- - - -
Thirdly, what will Newell do about their shareholding? They are the largest shareholder with 23.4% and have just lost their Board representation. Presumably they wish to divest their holding, so there is a massive overhang.
- - - -

This is out of Sprue's hands although I'm sure that its in the interests of both Newall and Sprue to place this with institutional investors (II's).

I have previously spoken with II's concerning Sprue (at company presentations) and know that the size of Newall's holding had previously put some off, while in some other cases II's couldn't gain a material stake in Sprue given the lack of available stock. Funnily enough, I discussed this very subject with Lord John Lee at Mello Derby in 2014.

Anyway, I'm hopeful on an orderly transition of the holding. There simply isn't the liquidity in the stock for them to dump volume into the market, especially a holding of 23%.

- - - -
The dividend is uncovered by earnings (2016 EPS 4.0p, DPS 8.0p). Forecast EPS for 2017 is 9p so the dividend is barely covered and I suspect that you won't see 9p anyway for the reasons set out above.
- - - -

Indeed, it is currently uncovered.

Sprue's executive team took the decision to maintain the dividend in light of the prospects of the company moving forward from 2016 issues.

Personally I took it as a positive & managements confidence in the future. Investors had suffered significantly with the share price drop so I found it reassuring that they felt confidence in maintaining the dividend which suggested that the issues encountered were surmountable and would be relatively short lived.

While its true that the dividend is currently uncovered, Stockdale have indicated that the dividend will rise to 9p this year and 10p in 2018. Against this they have forecast EPS of 9.1p EPS for this year and 12.0p for next. So only just covered in the current year if forecasts prove correct.

With net cash of £14.3m they can certainly afford to maintain the dividend as much of the investment has been made via last years software acquisition alongside the considerable product development they've undertaken in recent years. If stock levels normalise then this should also prove a boost to cashflow & net cash.

I would be absolutely astonished (and disappointed) if they were to cancel the 9p dividend for 2017. The company will have consulted with their brokers before this figure was issued, but again it's different opinions that make a market.

- - - -
You can also question the capitalisation policies for R&D spend and particularly the amortisation periods the company is adopting which look rather long to me.
- - - -

Yes, but in Note 6 of 2016 results they explain the multiple investments made in recent years, although I agree this is open to interpretation & ones own views on capitalisation.

They have been developing the next generation of products & iP over recent years and I'm certain will have taken guidance from auditors on amortilisation timeframe in light of regulatory guidance.

For example, they have only scratched the surface with their SONA trade range that has underwent considerable investment while the NANO had £1.4m spent on its development. Their result announcement indicated they had invested £5.4m in product development during the last 2 years.

Phew! Made it to the end.

Conclusion

Sprue announced during recent presentations that they are rationalising their product range. With the BRK brands returning to Newall it makes sense to ensure that they focus on the well regarded FireAngel brand...it should also assist them with inventory, marketing & of course has the added potential of improving cash management.

The recent result announcement listed their brands as FireAngel, FireAngel Pro, FireAngel Spec, AngelEye and FireAngel Connect.

So, in conclusion I still believe that Sprue's growth ambitions are achievable. They have a fantastic brand in FireAngel & are the market leaders in a number of sectors. I also believe that Stockdales guidance will prove to be conservative & hopeful that Sprue will continue to win a considerable share of the German retrofit & replacement market that is now available to them as their first smoke alarms were sold into Germany in 2006/07.

Hopefully they will also begin to make traction in the U.K.Trade market. I had hoped to see an uplift in their revenues given their investment in SONA last year, especially as its at higher margin to the likes of retail, but 2016 results revealed that revenue was static at £7m...and they've a potential £50m market to aim for in the U.K.

I'm also positive on them delivering new revenue streams from their Home Connected product during the next 12/18 months.

It is important that Sprue have products that cater for the various market segment & pleasingly a number of the current opportunities in the replacement cycle are for higher margin products & this plays into Sprues core strength of product innovation and development of iP for years now.

While there are a number of uncertainties as Leading indicated, Sprue have already dealt with quite a few over recent years & I'm sure will be presented with more in the future.

Investor Chronicle agree (kiss of death ;-) & gave the company a main buy recommendation in the 14th April issue.

IC conclude,

"We think the dark clouds that settled over Sprue in 2016 are already moving on and see plenty of reason for optimism. Discounting cash equivalent to 31p, the shares trade at just 14 times forecast earnings. The dividend is attractive, and while presently not supported by earnings, it is forecast to be 1.7 times covered by 2019 based on an 11p payout. BUY for the recovery and long-term growth prospects."

What doesn't kill you makes you stronger
(or so it goes ;-)

After 2016, I certainly hope so in the case of Sprue.

Kind regards,
GHF

[glasshalfull] 22/4/2017 12:29

Kinkell/ Blueeyes - Sure thing. I can provide an update & will post tomorrow.

As I mentioned to Leading, delighted to hear all considered views as it assists an investor to evaluate their investment in a company.

Kind regards
GHF

[blueeyes13] 22/4/2017 03:26

Glasshalffull, I'd second the request for you to please share your views on this board. I've been looking at buying an initial small position but share some of Leadings concerns particularly for me are operational issues and quality control given the history of the battery problem not too long ago. I always welcome reasoned and well argued for and against comments, it's one of the things which makes share investing so interesting to me and these boards. Thank you

[masurenguy] 18/4/2017 17:40

Good to see that Sprue bucked the market trend today with a 3% rise (albeit on small volume) compared to a 2.5% fall in the FTSE.

[kinkell] 18/4/2017 16:58

Glasshalfull,

Would appreciate it if you would be prepared to share your views on the other fears and assumptions mentioned by Leading.

[glasshalfull] 17/4/2017 16:16

Leading - Absolutely! All posts welcome...apart from the one liners that intimate the share price is going to the moon...or dogs...withought any clarification ;-)

I believe a number of your fears and assumptions are misplaced in this instance. Happy to clarify some of the points you've raised if you wish to email me on EDIT or contact by ADVFN message board.

One thing I will reiterate though for holders & lurkers, I indicated that the termination by Newall is v positive for Sprue & I've clarified with the company that there is no need to make any provisions on the back of this change.

A number of your other points are certainly valid. I've confidence in them overcoming obstacles but I do so from the belief brought about through meeting & speaking with the team over a number of years.

Kind regards,
GHF

[leading] 17/4/2017 11:31

I have had a look at these as a potential investment, but there are too many uncertainties for me I am afraid.

The company doesn't seem to be in charge of its own destiny. It relies on increasing government regulation to drive sales, rather than the merits of its own products, which is a weak position to be in. The internet of things obviously offers opportunities, which it is trying to address, but there are others with deep pockets playing here.

The change in distribution appears to have been driven by Newell/BRK rather than by Sprue. The change in distribution arrangements is probably positive for the company in the very long term, but in the short to medium term gives rise to various problems. The first is what to do about Newell stock. A provision will no doubt be required, but how large will it be? Stock levels are anyway too high by the company's own admission. Secondly, there are operational risks in bedding in the new manufacturing arrangements. Thirdly, what will Newell do about their shareholding? They are the largest shareholder with 23.4% and have just lost their Board representation. Presumably they wish to divest their holding, so there is a massive overhang.

The dividend is uncovered by earnings (2016 EPS 4.0p, DPS 8.0p). Forecast EPS for 2017 is 9p so the dividend is barely covered and I suspect that you won't see 9p anyway for the reasons set out above.

You can also question the capitalisation policies for R&D spend and particularly the amortisation periods the company is adopting which look rather long to me.

Anyway, I am sorry for being negative. I am not a holder of these and appreciate that holders will have different views, but these Boards would be useless if they only allowed positive posts.

[glaws2] 07/4/2017 06:47

The downgrades result from sterling weakness - FX headwinds due to inputs being priced in US $. In 2016 these were offset by £/Euro tailwinds which are not likely to occur in 2017/8.