Sprue Aegis is James Faulkner’s small cap of the week

I originally flagged fire & carbon monoxide alarms maker Sprue Aegis (SPRP) on this blog back in May, and although the shares are trading roughly where they were back then, management have just revealed that results for the year to 31st December 2014 will exceed expectations. With a further four months’ trading of the current year still to come, this is an exceptionally bullish statement. At t1ps.com, we continue to believe the shares represent excellent value at the current price of 255p.

Sprue has updated the market twice since I first covered the shares here in May. In July, the firm issued a trading update covering the first half of its financial year, to June, which saw another record period of trading, with sales up by 11% at £23.8 million. While overall sales were broadly in line with expectations, continental Europe (in particular Germany), saw strong demand, with sales significantly ahead of management expectations. On the downside, UK retail sales were adversely affected by customer destocking and the impact of reduced levels of carbon monoxide awareness campaigns. Also, the Utility & Leisure business saw sales slightly behind management expectations.

Boosted by operational leverage, first-half operating profit before exceptional costs (associated with the firm’s recent move to AIM and bid defence costs) is expected to be significantly higher than in the first half of 2013 when £2.1 million was posted. The recent strengthening of Sterling against the Euro and US Dollar is having little impact given that the company has high US Dollar denominated costs but earns a lot of sales revenue in Euros. Following a recent £8 million placing, the firm had net cash of £11.7 million at the end of June.

New products…

Elsewhere, Nano-905, the miniaturised version of the firm’s existing carbon monoxide sensor, has passed all final certification testing and can now be installed in Sprue’s carbon monoxide detectors, due to be sold during the second half of the year. The firm’s “connected home” trial, with Intamac Systems, to provide internet connectivity and remote monitoring of Sprue’s wireless home safety products, was also said to be progressing well, although revenues attributable this year from the venture will be negligible.

Strong second half…

Trading seems to have picked up markedly since the end of June, with the company’s order book said to have grown “considerably”, largely driven by a significant increase in smoke detector orders received for the French market. As a result, management now expects that results for the year ending 31st December 2014 will exceed market expectations.

With a significantly strengthened balance sheet following the placing we believe that Sprue looks well positioned to carry on taking advantage of opportunities in Europe, especially France, where new legislation requires that all domestic properties are fitted with a working smoke alarm by March 2015. In addition, Berlin (population: 3.3 million), Brandenburg (population: 2.5 million) and Saxony (population: 4 million), are yet to enact smoke alarm legislation, which is expected to provide additional growth in sales in the near future.

What’s it worth?

Sprue Aegis shares have performed well since their move from the ISDX market to AIM at the end of April. While slightly off recent all time highs of 279.5p the shares currently trade at 255p to capitalise Sprue at £116 million. Despite the strong performance we still see further upside in the shares, with them trading on a multiple of just 12.8 times the house broker’s forecast for next year, falling to 10.2 times for FY16.

Given the strong cash position (which covers 10% of the market cap), prospective dividend yield of 3.1% (rising to 3.9% for FY15), good growth opportunities, and exposure to markets underpinned by regulation and high barriers to entry, we believe the shares offer good value at a time when real value is becoming hard to come by.