No. of Recommendations: 34
Carmensfella noted in his recent post:

John (Lee) and I share many small company investments and do have very similar strategies. I shall leave you with one of his key final messages,

'For private investors still searching for the Holy Grail – a foolproof method of success on the stockmarket – I have a message: it doesn’t exist – or at least in more than 50 years of investing I haven’t found it! However, what I have concluded is that companies with a significant cash holding, or at least a very low level of debt, are generally safer and better havens for one’s funds'

Given John Lee’s penchant for small caps and criteria where he looks for significant cash on the b/s then how does this company stack up;

Delivering strong cashflow, maintains a healthy balance sheet; net cash c.30% of the market cap; low single digit PER; key barriers to entry; exclusive distribution agreements with B&Q & Tesco’s; consistent growth performance over last 5-years (PTP growth during last 5-years and last 4-years EPS growth) & forecasted 5% dividend yield, & most importantly, produces & distributes products that save lives!

The company are Sprue Aegis (SPRP) and I along with a number of fellow Fools had the pleasure of attending a Mello presentation featuring their management team in May 2011. I've been extremely impressed at Sprue's development over the last 12 years and retain considerable confidence in the talents of Graham Whitworth (CEO), Nick Rutter (MD) and John Gaghan (FD) where I maintain regular dialogue over developments. Put simply, in over 20-years of investing in the small cap arena I have not come across a more competent team!

This week saw the start of the annual CO Be-Alarmed campaign with coverage on BBC Breakfast and ITV News highlighting the risk of CO poisoning ...and showcasing Sprue Aegis “FireAngel” detector:


This follows on from Fire Safety Week the proceeding week.

I suppose that by default I appear to be their biggest cheerleader having constructed a detailed investment thread over on ADVFN which will provide background info & financial info which suggests they are a strong ZULU stock candidate trading on a very lowly multiple given their consistent track record.

265 posts in almost 2-years confirm it as a quiet backwater which hopefully encapsulates the investment case without too much froth.

My reason for posting today is two-fold. I’ve been a stranger to the Pub over the last year but note its recent resurrection with a plethora of investment ideas through Carmensfella’s encouragement (who deserves a medal for his efforts ;-) Sprue have also announced news today of an exciting deal with British Gas which I believe underpins forecast EPS growth of 50% in 2013 & thus an appropriate time to share this investment idea.

Before providing a brief update on why I consider this to be a compelling investment I would like to clarify that the stock is traded on the new ISDX platform, which is ICAP’s replacement to the PLUS market.

This will have a number of investors running for the hills BUT I would like to record that the company have intimated to me that they see no immediate requirement to seek a Full listing or even an AIM listing, intending to plough the cost savings made on beefing up the dividend yield, which is quite considerable.


Company web-site:

CEO video presentation with overview of the company (10/10/12):

Link to ICAP Platform with Sprue Aegis trade data/share price charts:

Market Cap & Financials snapshot

Share price 63p (mid price)
Market Cap £24.3m
Shares in issue 38,508,895

Earnings Record

(EPS listed below on a fully diluted basis)

31/12/07 - 3.51p - £770k PTP

31/12/08 - *3.36p - £1m PTP

*EPS shows slight fall over 2007 due to tax payable for 1st time in 2008. The 2007 results were boosted by utilisation of tax losses.

31/12/09 - 4.49p (+33.6%) - £1.9m PTP (net cash £1.7m)

31/12/10 - 5.82p (+29.6%) - £3m PTP (net cash £4.5m – Dividend 1.0p)

31/12/11 - 6.94p (+19%) - £3.4m PTP (net cash £5.9m – Dividend 2.0p)


31/12/12 - **7p (+1%) - £3.4m PTP (net cash forecast c.£7m – Dividend forecast 3.0p)

** 2012 growth only marginal as impacted by “perfect storm” of events – see summary

31/12/13 - 10.5p (+51%) - £5.3m PTP (net cash forecast c.£9.6m – Dividend forecast 4.5p)

About Sprue Aegis (per recent RNS)

With its head office in Coventry, UK, Sprue is Europe's leading home safety products supplier and designs and distributes smoke alarms and carbon monoxide detectors including other safety related products throughout Europe under the FireAngel, First Alert, BRK and Dicon brands.

They have a leading UK retail footprint, is the supplier of choice to the UK's Fire and Rescue Services and continues to develop its market share in the UK trade sector and in Continental Europe through its network of independent distributors. At its wholly owned subsidiary in Canada, Sprue has developed one of the world's smallest CO
sensors for use in CO detectors. Sprue has patented technology in Europe, the US and other selected territories and its range of smoke and CO alarms is independently certified to the latest European standards.

The "FireAngel" brand delivers a variety of innovative products and supports the highest selling smoke alarm in the UK (ST-620 Thermoptek smoke alarm).

The CEO’s video presentation (with slide show) covers details on the company’s development since inception (link above) so I will not dwell on this aspect of their historical progress in this write-up.


Final Results for the year ended 31 December 2010>

Financial highlights:

* Turnover increased by 108% to £29.9m (2009: £14.4m)
* Operating profit up 53% to £3.1m (2009: £2.0m)
* Underlying gross margin* of 42.1% (2009: 37.5%)
* Profit before tax up 56% to £3.0m (2009: £1.9m)
* Basic EPS increased by 34% to 6.25p (2009: 4.67p)
* Net cash of £4.5m (2009: £1.7m)
* Final dividend proposed of 1.0p per share (2009: 0.5p)

Final Results for the year ended 31 December 2011

Financial highlights:

* Turnover increased 11% to £33.3m (2010: £29.9m)
* Operating profit increased 13% to £3.5m (2010: £3.1m)
* Gross margin (before BRK distribution fee) improved to 44.6% (2010: 42.1%)
* Operating profit margin increased to 10.4% (2010: 10.3%)
* Profit before tax increased 14% to £3.4m (2010: £3.0m)
* Basic EPS increased 23% to 7.66p (2010: 6.25p)
* Recommended final dividend doubled to 2.0p per share (2010: 1.0p)
* Net cash increased to £5.9m (2010: £4.5m)
* Net cash inflow from operating activities at 100% of operating profit
(2010: 129%)</font>

Interim Results for the period ending 30 June 2012

Financial highlights

* Turnover eased slightly to £16.7m (HY 2011: £17.1m) due to unfavourable translation impact on Euro income, lack of NF certification on key products in France (now resolved), and a slight reduction in UK F&RS sales. Sales into UK Trade, Retail and Utilities and Leisure all increased compared to the first half of 2011
* Underlying gross margin1 reduced to 43.7% (HY 2011: 44.4%) due to product cost inflation of around 5% and the adverse translation impact on Euro income which were largely offset by favourable forward foreign exchange contracts compared to HY 2011
* Operating margin at 8.4% is comparable to last year (HY 2011: 8.2%)
* Net cash increased by 29% to £5.3m (HY 2011: £4.1m)
* Basic earnings per share increased 20% to 3.19p (HY 2011: 2.66p) primarily due to beneficial R&D tax credits and an overly cautious tax rate assumption in HY 2011</font>

Investment Case

Sprue Aegis has been delivering double digit growth on profits for a number of years now as detailed above.

They have achieved this through developing an innovative product set through their “FireAngel” brand and employing reverse-engineering technique to ensure that the cost price inflation seen across most commodity sets over recent years is mitigated. Astonishingly, this attention to detail has ensured that not only have margins held up, but have increased during recent years (gross margin 37.5% in 2009 that increased to 44.6% last year).

It is also worth noting that they concluded a transformational deal with billion dollar Jarden Corporation in 2010.

Rather than compete head-on with Jaden’s “BRK” European arm which incorporates three well established brands, Sprue obtained agreement to takeover the brands for an annual distribution fee, thus removing a competitor and allowing the opportunity to penetrate European markets with a four branded product set that was subsequently re-branded as Sprue Safety Products.

Now for the interesting bit. One of the main reasons for the Jarden deal was an entry into a number of new markets, one of which is France. The French passed legislation in 2010 that every home should have smoke alarm installed by 2015. As there is only 5% penetration of smoke alarms in French homes, this creates a market opportunity estimated at 55 million smoke alarms which require to be installed by 2015. Sprue won’t capture it all, but with four brands have a good opportunity to grab a large slice.

With considerable investment in product during 2011/12 & the completion of further exclusive distribution deals such as the recent sole supplier deal to B&Q.

I believe there are considerable barriers to entry for any would be competitor, both in terms of obtaining requisite regulatory requirement in the various geographical markets & competing with Sprue’s innovative product line up, in terms of quality & cost. There's also the barrier of Sprue's entrenched position in the retail sector as sole supplier to Tesco (& now B&Q); an increasing penetration of the trade sector (revenue +18% in H1) and a growing presence in the leisure & utilities sector (revenue +25% in H1). Sprue also has agreement with 98% of the UK Fire & Rescue Service who distribute their products under the “Firebuy” scheme, which again confirms their dominant position.

Today saw Sprue Aegis announce a significant deal with British Gas who will distribute their Carbon Monoxide Alarms for an initial period of 3-years.

“The Company manufactures its own carbon monoxide sensors at its wholly owned subsidiary Pace Sensors, based in Canada. It has entered into an agreement to supply British Gas Services Limited("British Gas Services") with carbon monoxide alarms for an initial period of 3 years, beginning 1 December 2012, with the option of a further two, one year extensions.

Under the agreement, the Company will supply bespoke carbon monoxide alarms dual-branded "Pace Sensors / British Gas" or "Pace Sensors / Scottish Gas" for sale to British Gas Services' customers. The contract helps underpin growth in revenue post 2012.”

While the market for smoke alarms differs in terms of penetration across Europe, recent articles indicate that UK penetration of CO alarms is under 40%, with many of those without a detector citing the fact that they thought they did not require one as they had a smoke alarm fitted!!! This highlights confusion between the two types of alarms and I would suggest confirms considerable market opportunity to increase penetration.

Profits historically have had a significant bias towards the second half, with 7p EPS forecast (on fully diluted basis) for year ending 31/12/12, which although signifying a continued growth path, reflects the impact of a perfect storm of events that the company encountered during 2012 - regulatory delays; cost/price inflation; weak European market due to macro events; weakness of Euro in translating profits to Sterling and all of this as they have invested considerable time in developing a new generation of products thus signifying the strength of the company in dealing with these considerable impact factors and still forecast to maintain growth.

However, they should have c.£7m net cash at 31/12/12 which equates to just under 30% of the market cap and forecast to pay a dividend of 3p for year ending 31/12/12 which signifies a dividend yield of almost 5%, a 50% rise over 2011's dividend.


If one excludes cash, then the shares trade on a derisory enterprise value of c.£17 million or prospective PER 5 (inc cash), while not forgetting that their progressive dividend policy is forecast to yield over 7% in 2014. They have already delivered 5-years of pre-tax profit growth & 4-years of earnings growth (would be 5-years EPS growth but 2008 EPS appears static as 2007 results flattered by utilisation of tax losses) and with significant barriers to entry as discussed above. They operate in a growth market, supplying products that save lives and are seeing increased market opportunities in both the smoke and CO sectors across a number of different verticals as I've discussed briefly in the investment synopsis. All of this confirms Sprue Aegis as a compelling investment case, all IMHO.

Please DYOR.


ADVFN thread:
Print the post Back To Top
No. of Recommendations: 1
thanks for the very interesting idea. I looked at SPRP some time ago, and for some reason rejected it. I will look again!
Print the post Back To Top
No. of Recommendations: 0
Can you tell me what PTP means? I'm unfamiliar with the term and couldn't see definition in your post.

Print the post Back To Top
No. of Recommendations: 2
I recently replaced my old alarm with one of their thermo-optik ones and I'm certainly impressed by the product. No radioactivity. Much less likely to false-alarm on dust or normal kitchen output. Louder alarm than any I've heard before. Built-in battery that's guaranteed for ten years. Attaches to plate screwed to ceiling, so no future hassle replacing it when its time comes (just as long as you buy another from the same company!)

I wonder how many of the UK homes with a detector have an ancient ionisation-chamber device and are lulled into a false sense of security because it still makes noise when you press the button? Unfortunately as this sort of alarm ages, its sensitivity decreases. There's a small date label inside telling one when it should be replaced ... about two decades ago?
Print the post Back To Top
No. of Recommendations: 0
"so no future hassle replacing it when its time comes"

interesting tux, so how long do they say they will last?
Print the post Back To Top
No. of Recommendations: 0
PTP - pre tax profits?
Print the post Back To Top
No. of Recommendations: 7
I've done a write up following on from the good work Glasshalfull has done on Sprue Aegis over at my blog for those who are interested:
Print the post Back To Top
No. of Recommendations: 0
CEV thanks for that nice write up and I like the sound of it. Trouble is when I asked my broker to give me a quote he said only 2,500 available on the offer at 120p and a spread of 115.5-120 so pretty illiquid and a large spread. Is there a way to get into these other than dealing expensively through ISDX?

Print the post Back To Top
No. of Recommendations: 0

Sadly not that I know of - it was quite a hassle buying mine through TD Waterhouse (I had to phone them up and sit on hold for almost an hour... terrible service if you ever need to call them). I think the only way is to see it as a semi-illiquid investment; given it's one I intend to hold for a long time as I think they have great long term growth prospects and a very shareholder friendly management the spread and illiquidity doesn't bother me - definitely not one to buy with the expectation of a quick trade though.
Print the post Back To Top
No. of Recommendations: 0

What would happen to your holding if the company were to move to AIM, do you need to sell and repurchase or are your shares just transferred? Sorry if this is a stupid question.

Also would they then become more liquid?


Print the post Back To Top