Sprue Aegis profits go up in smoke, a gamble worth taking? - Lets

Time for another post in our investing series.  When choosing which company shares to invest in we use techniques similar to those used to select matches to trade on Betfair (the betting exchange).  Not all investments will be successful but by doing a bit of research we can select which are more likely to be successful.

Sprue Aegis is one of Britain’s largest manufacturers of smoke alarms and carbon monoxide detectors.  Tesco and B&Q are two retailers who sell Sprue Aegis’ product.

No doubt if you have a smoke alarm which most households will you will remember the annoying chirping sound they make when the battery is low.  Due to a fault with the battery there are now many families around the country annoyed by a constantly chirping smoke alarms when the battery is not flat.  Warranty claims are likely to wipe out a large proportion of the firms profits this year.  These products have a lifetime warranty which may further exacerbate the problem.

So the firm has got problems, so where is the investment opportunity?

Due to the falling profit expectations of the firm the share price has been wacked, halving in the last month.  That is a big decrease and seems over done.  Crowds can often be irrational with sentiment swinging from one extreme to another which is how stock markets seem to work.

Why do we like Sprue Aegis shares?

First lets deal with their problems.  The cost of honouring the warranty will be amortised over the next six years and should be £5.5M.  In the latest trading update it was marked as being exceptional, which generally means a one off event (exceptional in other words).

Other potential negative points are that one of the firms largest suppliers, BRK Brands, is also one of the company’s largest shareholders.  Whether or not BRK brands is involved has not been revealed.

Now for some of the positives.

  • Markets for home safety products is a strong market, which regulations are sympathetic too.  Private landlords have to ensure properties have smoke alarms and carbon monoxide detectors.  Local Authorities insist that safety products are fitted when carrying out a loft or attic conversion.
  • Properties with a wood burning stove are also required to have a carbon monoxide alarm.
  • UK Fire & Rescue Services use their products as a preferred supplier.
  • Revenue has grown each year for more than a decade, up 35% to 2015.
  • The company has no debt and a strong balance sheet with £22m in cash.
  • The dividend has not been cut and it is now at an attractive level.

Sprue Aegis is a small company having just £88M of revenue in 2015.  Small companies often have a volatile share price, shown by recent events, especially when something has not gone to plan.  Now the the share price has come down to earth now could be a good time to buy some shares.

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