The share price of Sprue Aegis (SPRP) halved after the home safety products supplier downgraded profit expectations substantially. Management has identified a potential problem linked to batteries supplied by a third party that could cause a premature low battery warning signal in some of its smoke alarm models sold in the UK and in continental Europe. As a consequence, the board has proposed to increase the group's warranty provision as at 31 December 2015 by £5.5m to £6.8m, compared with £900,000 in 2014.
Sprue Aegis now expects operating profit for the December 2015 year-end to come in around £7.3m versus previous expectations of £12.1m. However, even aside from this specific issue, the group revealed that overstocking in France, and weaker sales in Germany, would also have a negative bearing on expected results for this year. So subject to no major changes in exchange rates, Sprue Aegis now expects a first-half operating loss of approximately £1.9m. For the 2016 year-end, the group now anticipates sales and operating profit of approximately £55m and £1.9m, respectively
Management has introduced additional screening processes on the production line prior to the battery being fitted into finished smoke alarms, but the cash cost of dealing with the issue is expected to stretch over the next six years. This reversal, seemingly predicated on a minor issue, highlights the flip-side of the growth prospects afforded by smaller plays on London's junior market.
