FireAngel Profit Warning (LON:FA) Supply Chain Issues: Shares Fall 30%

Fireangel Safety Technology (LON:FA) is perhaps a name that isn’t that well known, which is no surprise seeing as it changed names on the 28th of June from Sprue Aegis. Arguably this change of name makes sense, reflecting the changing strategic direction and emergence of the FireAngel brand. Today a Fireangel profit warning caused a 30% drop in the share price.

For those that are unsure what this company does, you may already have some of their products in your home. They manufacture and design home safety products such as carbon monoxide detectors and smoke alarms under a variety of brand names. Given that virtually every modern house has and office has one of these, there is a good chance you have indirected used one of their products. Many of these brands have good reputations and are sold widely.

That’s about it for the good news. This share has been pretty much a disaster for anyone investing in it in the last couple of years. It was admitted to AIM in 2014 and had a couple of good years, but it’s been steadily downhill since then. Today’s low of 42p is less than 20% of the price it gained after the first day trading:

Much of the pain has been caused in the past two years, as profits and margins have slumped badly. Today, it has gone one step further and issued a profit warning that guides that FY18 will actually result in a small loss. It almost seems as if the IPO caught the company at its strongest, and various pressures have seen performance constantly decline.

The shares were marked down 30% in early trading today as a result, and the market cap has declined to (perhaps) bargain levels.

The cause of the warning is explained, and guidance is given for the scale of the losses:

However, the Board now expects that results for the year ended 31 December 2018 will be below market expectations, delivering a potential loss of up to £0.5m. This is driven by a combination of certain short term transitional issues within the supply chain recently identified, the continued weakness of GBP Sterling against the USD dollar and difficult UK high street trading.

The company has seen hard times recently. Last year seems to have been characterised by a dispute with ex-partner BRK which turned acrimonious. This dispute caused the delay of the last year results, and a resultant £3.8m exceptional charge to profit last year, the majority of which was a write-off of former inventory costs. In addition, a bill of almost £11m has to be paid by the end of the year, by monthly installments.

It seems clear from the figures that BRK was a major part of the business, so the cut-off of this supply line would have significant effects for the business. And this is laid out in the profit warning:

The Company expects to report H1 2018 sales of approximately £17.7m (H1 2017: £26.0m) and an operating loss of approximately £1.8m (H1 2017: £1.5m profit)

That is a big decline. The good news is that the company has recovered and gained a new partner in Poland who will produce and ship products, which explains the ‘short term transitional’ issues. And given this, the name change makes sense as well – it is more relevant and almost something of a new start for the company. One problem that may become more relevant is whether the FireAngel are setting themselves up for another miss later in the year. FY18 is guided at £0.5m loss, but H1 is already at £1.8m – meaning we need to see profits of £1.3m in the second half just to not miss the target. It seems clear that they cannot afford any more mistakes for this to be achieved.

Does the Fireangel Profit Warning mean a buying opportunity?

One of my initial thoughts is that the company moat here isn’t very big. There are no significant barriers to entry for this type of business, and anyone wanting to enter could strike a deal with a previous supplier (like BRK) or a Far East supplier (like FA) to produce smoke alarms and carbon monoxide detectors. The technology on these items is relatively old and the products sit in a mature market.

It must be fairly difficult for competitive advantage to be built in – how would a customer choose a brand where there is virtually no product experience. Safety is the key concern, but at the same time it would be fairly difficult to get a big price premium. A product costs £15, give or take a few pounds. FA have other gimmicks such as ‘toast proof’ – ie an alarm which isn’t set by cooking, but I’d imagine this is fairly easily replicated.

One of the battlegrounds where product development is taking place is the connected home – where devices such as lightbulbs, switches and so forth connect to your network to provide extra functionality. There are a multitude of product enhancements that can take place under this umbrella, few of which appear that compelling in that they make a product a ‘must buy’.

I’d argue that FireAngel might get distracted by this. I have seen a few on sites such as Seedrs, and I think that is the best place for them. The start-ups can concentrate on the development of these products unencumbered by other business, and investors can speculate and get returns which compensate them for the risk. In addition, Nest seem to be really going for the fully-integrated home solution, I think it would be a bit of a gamble for FireAngel to compete and offer a similar range of product.

One of the good things is that the company carries no debt although the cash balance is way down. It suffered quite an outflow of cash last year but it is reasonable to say that much of this occurred due to one-off factors, such as the settlement with BRK and the establishment of a new facility on Poland. There is a £7m revolving credit facility which is untouched and should provide the headroom for the remainder of this year.

Another positive that I like is that directors have a heavy stake in the business. Their remuneration has also taken quite a hit in these lean years of business.

Going forward the outlook is positive:

However, the Board expects the Company’s operating results to improve significantly in 2019 and beyond when there is no BRK distribution fee to pay and, as expected, sales increase into newly emerging channel opportunities, recover in the Group’s key market, Germany, together with sales growth in UK Retail and UK Trade.

If you can believe in this, then the shares are good value at present. A sustained performance like what they predict in H2 this year would put the valuation on a very low multiple at this price, and the lack of debt means that even though there are £13m of intangibles on the balance sheet, the share is still worth under net tangible value.

The other view is that there is no real inherent advantage in any of their products – either software or hardware, and a sustained marketing and sales campaign is required. Personally my belief is in the middle. I think this year will still result in cash going out as the settlement is paid for, and there is a large unknown when it comes to Brexit and what form it’ll take. But at the same time, I think the core product has occupied a good position in the retail and trade sectors that it needs to uphold.

I am inclined to rate this a 2/5 – there is a path to recovery but there are uncertain macro factors ahead, but given previous results I am uncertain if there is sufficient ability.

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