Has all the easy money now been made on Sprue Aegis (SPRP:AIM) shares? The home safety products supplier has enjoyed a tailwind from new laws in France that require every home to have a smoke alarm. That catalyst now looks exhausted as it reveals sales in the country have ‘softened considerably’, sending the share price down 4% to 325p.
For now, French weakness has been offset by higher carbon monoxide detector sales in the UK following new legislation for landlords, as well as higher marketing activity by Sprue. Sales into the UK Fire and Rescue Services were also boosted by funding from the Department for Communities and local government in 2015.
Yet these new laws and pockets of extra funding cannot be relied upon indefinitely. Does Sprue always have to come up with new products to drive profit in the future, or is there enough steady business to keep earnings ticking over? These are the sorts of questions that investors must now ask.
The small caps warns that earnings in 2016 will be ‘strongly weighted’ towards the second half of the year. That is never a good sign. It is essentially rebasing investors’ expectations should it fail to get the anticipated uplift in second half sales. The risks are clearly elevated and so the stock should theoretically have that risk discounted in its valuation.
Fundamentally, Sprue Aegis is a fantastic business and one that has richly rewarded shareholders over the past few years with impressive share price gains. Yet the share price rally has come to a grinding halt over the past six months, and for good reason.
The stock market is forward looking, so the outlook statement is arguably more important for the share price than guidance on earnings expectations for 2015. These are historical earnings – the market is concerned about the future and the share price is the market’s way of pricing in future earnings expectations.
Sprue says operating profit will be up 16% year-on-year in 2015 to £12.1 million and revenue up 35% to £88.3 million. Cash at the end of 2015 was £22.4 million and it has no debt.
The next potential catalyst for the share price will come in April when Sprue updates investors on its ‘connected homes strategy’. That information will appear alongside the publication of its 2015 financial results.
At the half year results in September 2015, Sprue flagged that Germany sales should enjoy a tailwind from legislation which requires smoke alarms to be fitted in every bedroom, child's room and hallways of every home in two states by the end of 2016 and 2017 respectively.
It also says the 10-year replacement cycle of smoke alarms installed in Germany in 2006 was about to start, providing revenue opportunities with increased level of technology resulting in higher local currency replacement product prices.