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Sprue Aegis – shares slump on a “Termination for Breach Notice”. Overdone?

By Steve Moore | Friday 23 March 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Shares in Sprue Aegis (SPRP) are currently down 25% on the day, at 142.5p, to capitalise the company at sub £65.5 million, on the back of a “DA Termination Notice and Update re final results” announcement…

The distribution agreement ‘termination notice’ is actually a “Termination for Breach Notice” alleging Sprue “is in breach of certain provisions (relating, inter alia, to the company's rights to use certain BRK trademarks)” and stating that “the breach is not curable and as such BRK is terminating the distribution agreement effective as of 22 March 2018 and that BRK shall not be purchasing any stocks of unsold products”.

This follows on 31st March last year it announced that, having considered various different options, it became clear that the best interests of both parties would be served by going their separate ways and that “Newell therefore decided to serve the requisite 12 months' written notice on Sprue to terminate both the BRK Distribution Agreement and the DTL Manufacturing Agreement”, but that “Newell will of course honor any contractual commitments and we intend to work with Sprue on an orderly transition. We wish the Sprue board well with their future plans”.

Seemingly not any more! Sprue notes also the expiry of the notice period “would end Sprue's obligation to pay the fixed BRK annual distribution fee of £2.9m”, that it “is taking legal advice with regard to the Termination for Breach Notice and the allegations made by BRK” and “will be carrying out an assessment of the value of the stocks of unsold products which BRK has stated, in the Termination for Breach Notice, it is not going to purchase”. The situation also means “the audited final results for the year ended 31 December 2017 will not now be announced in late March 2018. A further announcement will be made in due course”.

Sprue's September-announced half-year results contained on the repurchase of stock by BRK that “it is expected that this will result in a cash payment to Sprue of at least £3.0m assuming that in the meantime, Sprue has not sold the remaining BRK stock. As at 30 June 2017, the gross book value of BRK stock held by Sprue amounted to £4.8m”, whilst showing current assets of £38.1 million (though including an increased £14.4 million of receivables and slightly reduced £13.2 million of inventories) against liabilities of £21 million, with cash (net) £10 million.

This was followed in January with that “the transition of manufacturing to Flex in Poland and the sourcing of products from a leading Far East supplier are on track. We are excited about becoming independent from Newell Brands from 31 March 2018 and believe that 2018 is set to be a transformational year for the group”. That saw house broker Stockdale update “we maintain our 250p DCF-derived target price. Indeed, there could be significant upside to the target price as there is likely to be potential benefits from currency movements and our analysis still uses, in our view, a conservative WACC of 11% and 2% long-term growth rate”.

However, I suggest the start of new manufacturing and sourcing means currently elevated risk and also note the Finance Director tendered his resignation with immediate effect earlier this month and that BRK Brands Europe has a 23% shareholding. As such, for now, only on the watchlist.

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