Advertisement

Gamble of the week: beaten-up smoke alarms maker

This maker of smoke and carbon monoxide alarms is a speculative punt, says Alex Williams. But its also looks excessively cheap.

Sprue Aegis (LSE: SPRP) makes smoke alarmsand carbon monoxide detectors. Its shares have halved in the last month from 269p to 120p, after a fault with its batteries was revealed. Warranty payments usually cost the company under £1m a year, but it is now budgeting for the figure to spike to £6.8m, equal to a full year's profit. "Dodgy batteries" mean the British firm expects a "deluge of guarantee claims from irritated customers", says the Daily Mail. Managing director Nick Rutter, who co-founded Sprue in Coventry in 1998, has seen over £4m wiped off the value of his own shares.

Advertisement - Article continues below

But electrical goods can be a lucrative market. New legislation forces private landlords to fit carbon monoxide detectors and Sprue supplies B&Q, Tesco and Amazon. It also has public-sector contracts, supplying 90% of alarms bought by the UK's fire brigades. Revenue has grown yearly for more than a decade, hitting £88m in 2015.

The fear is that Sprue has grown too fast, losing track of its suppliers. Management has tightened up its production line, says Investors Chronicle, but the panic "highlights the flip-side" of the risk involved when investing in small, fastgrowing companies. The jump in warranty payments means earnings are now difficult to quantify.

Sprue is a "highly speculative investment," says Shares this battery issue isn't the only potential hitch. Last year, a manufacturing facility in China had to be relocated because of plans to build a railway through the site. Its largest supplier, BRK Brands, is also its biggest investor, while its household brands, including First Alert and SONA, are only licensed until 2018.

Yet Sprue's problems may not be as bad as they sound. Its alarms still work some might just "chirp" prematurely. And the cash cost of the warranties will be eked out over six years, with a negligible impact on the balance sheet, which has £22m in cash and zero debt. The dividend is also unchanged at 8p per share, putting Sprue Aegis on a generous 6% yield. For a fast-growing company, that looks excessively cheap.

Advertisement
Advertisement

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020