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Sprue Aegis – with 2017 results including a more than doubled adjusted profit, why another share price slump?

By Steve Moore | Tuesday 15 May 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.

“Highlights” of calendar year 2017 results from Sprue Aegis (SPRP) - proposed to be re-named FireAngel Safety Technology Group - include adjusted profit before tax up to £4.7 million, from a prior year £2.3 million, yet the shares have responded to the results announcement currently more than 25% lower, to below 100p…

The noted profit performance reflects increase in gross margin and reduction in distribution and administrative expenses, with revenue actually 5% lower, at £54.3 million - “affected, in particular, by a slowdown in sales into Germany in H2… The German trade market is shifting dramatically to higher value connected alarms which, in the medium term is good news for Sprue, but, in the short term, will be challenging until our new connected product range targeting this market is available in early 2019”.

I previously noted working capital questions raised and that it will certainly be very interesting to see the full-year cash flow and balance sheet – cautioning, at well over 100p, with also particularly the start of new manufacturing and sourcing suggesting elevated risk.

I particularly note on the cash flow statement £4.3 million of investment spending more than depreciation + amortisation, following £3.7 million more the year before and the announcement including “commitment for continuing significant investment in new products and technology”. This all thus suggesting the stated ‘profit’ not the most useful of metrics! The balance sheet showed current assets over total liabilities reduced by £6.9 million to £11.4 million and cash (net) of £3.3 million. The dividend has been axed and…

“Sales in the four months to 30 April 2018 are approximately 20% lower than in 2017... With disruption from the transition to the new FireAngel range, new product introductions and lower than anticipated sales into Germany in H1 2018, due mainly to overstocking, the board expects that the group will report an operating loss for H1 2018. In addition, the group's sales and operating profit for the full year are likely to be significantly below the most recent market expectations. The company's 2018 results will be more heavily weighted towards H2 than has been the case in recent years.”

The company argues this “as we install new FireAngel retail ranges, potential new sales emerge and sales into Germany are expected to recover… Expects the company's operating results to improve significantly in 2019 and beyond when there is no BRK distribution fee to pay and, as expected, sales increase into newly emerging channel opportunities and, recover in the group's key market, Germany, together with sales growth in UK Retail and UK Trade”.

Hmmm – we’ll see on those and, meanwhile, on the above-noted underlying financial metrics, the current share price reaction looks entirely understandable to me and I continue to avoid.

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