Buying opportunity as sterling whacks Sprue Aegis?

Sprue Aegis, one of Europe's largest suppliers of alarms and safety products, is going to smash sales expectations in 2015 thanks to a heavy French order book and favourable legislation. But news that the weaker euro will bring profits "marginally" below guidance has sent alarm bells ringing. However, a big sell-off in early deals looks harsh and investors have already begun snapping up cheap stock in this high quality operator.

Since floating on AIM, Sprue has launched a number of new Sona smoke and carbon monoxide products, which builds on its FireAngel and AngelEye brands. And with the world increasingly embracing the Internet of Things, management says trials to connect its safety products to the web are "highly encouraging".

Sales jumped by over a third to £65.6 million in 2014, thanks to European revenue more than doubling to £39.95 million. New French legislation requiring all homes to be fitted with at least one working smoke alarm helped buoy sales, along with the strengthening of the UK housing market. Unfortunately, UK cuts caused some fire brigades to close, which put some pressure on sales.

Pre-tax profit nearly doubled to £9.6 million and basic earnings per share (EPS) rallied by two-thirds to 17.6p. Ending the year with no debt and £15.9 million of cash, Sprue is recommending a final dividend of 6p per share, taking the annual return to 8p per share, up a third on the year.

After last year's IPO, which raised £7.2 million at 200p each, management has been focusing on improving cash flow, and £8.8 million of cash was generated from operations, up three-fold on the year.

Investment in protecting its new brand developments caused current liabilities to nearly double at £22.3 million, but as Sprue has a current liquidity ratio of 2.2 times, it has enough assets to cover its short-term debt obligations.

France is ahead of expectations and its order book extends into the second half of 2015, so this year's sales are going to be ahead of expectations. But as over 60% of its sales are from Europe, the weak euro means a big translation hit as those earnings are switched back into pounds and pence.

Robert Sanders, an analyst at house broker Westhouse Securities, says:

Every one cent move [currency exchange] leads to a £0.3m-£0.4m change in revenues and profits. This has meant despite increasing (relative to our previous numbers) our underlying European sales and group forecast substantially in 2015 to £74.9m (£66.1m) our sterling adj. PBT forecast has been reduced to £10.2m (£10.5m). We still expect a fall-off in European sales in 2016 so now forecast group sales of £70.0m (£71.4m) and adj. PBT of £9.2m (£13.1m).

He reckons Sprue's shares are still worth 400p, believing its product will help drive operating profit and cash. "Any strengthening of the euro likely to lead to profit upgrades we see further upside potential in the share price in due course," adds Sanders.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.