James Faulkner on Sprue Aegis – growth, income and value

Sprue Aegis (SPRP), one of my small cap stocks for 2015, has started the year by announcing that profits for 2014 will be ahead of expectations. The home safety products specialist said on Monday that after another strong year of record sales, it now expects results for the year to be ahead of market expectations with sales of £65.6 million, up 36% on the prior year, and an operating profit of approximately £10.3 million, up 94% against last year.

This is being driven by particularly strong demand in France ahead of the introduction in March 2015 of a legal requirement to have at least one working smoke alarm in each domestic property. With an estimated footprint of around 50% of French DIY and 75% of French retail space, Sprue is well placed to capitalise on this legislative backdrop, and its order book has ballooned to an unprecedented level on the back of this.

Elsewhere, there is additional legislative action on the horizon that could provide further momentum to Sprue. 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. Also of note is the fact that Sprue has secured North American UL component recognition on its Gen 1 carbon monoxide sensor to sell that component in products in North America, which could in time pave the way for the company to enter the huge US market.

Investment in product development increased by 40% in 2013 to £1.4 million, which underlines Sprue’s continued commitment to innovation and its drive to remain at the cutting edge of the industry. The fruits of recent investment are now beginning to be seen. Sprue’s new “SONA” range of products for the trade sector are intended to grow its market share in an area where it has historically been under-represented. Customer feedback for the SONA mains powered smoke alarm, which is the first alarm in the UK to have a proven carbon footprint and uses just a fraction of the stand-by power of a conventional smoke alarm, is said to have been “highly encouraging”. In addition to the incorporation of Nano-905 in carbon monoxide detectors and the rollout of a “connected home” offering, these developments have the potential to deliver higher margins in due course.

What’s it worth?

With plenty of new products in the pipeline and international expansion on the cards, I believe Sprue is well placed to continue grow in the coming years. House broker Westhouse now anticipates EPS of 20.2p in 2014, which implies a historic rating of 16.5x. However, it retained its forecasts for FY15 and FY16 (despite raising its revenue forecasts slightly), so the current rating is 16.6x, falling to 13.2x for FY16.

A healthy prospective yield of 3% rising to 3.6% for 2016 means the stock also has income as well as growth attractions. These are reasonable metrics for a business that benefits from a defensive and reliable source of demand underpinned by legislative and regulatory action with significant barriers to entry. There is also net cash of £15.9 million on the balance sheet.