Fire alarm manufacturer FireAngel Safety Technology (LON:FA) today released another disappointing trading update as they look set to wrap up a disastrous year in which profit turned to loss, and this is before a large tranche of exceptional costs was declared today. The share price opened up much lower, but recovered a little to 16% down:
The share is now exceptionally cheap compared to the 200p it was worth a year ago. And to add insult to injury, a potential turnaround has been on the cards for over a year now, but operational and logistical issues have dogged it badly. Considering the business it is in, which is relatively low complexity and few moving parts, many investors have been incredulous that problems keep on occurring.
We shall not recap the company in too much detail already – it was covered in a previous profit warning. It carries several strong brand names in the fire alarm market, and on the back of that has signed agreements for supply for commercial and residential properties – a potential good source of revenues.
The previous profit warning sent the share price crashing by 30%, and was blamed on a myriad of issues: the GBP/USD exchange rate, short-term logistical issues. In addition, they had a legal dispute with a previous partner which was settled, and located a new one based in Poland.
The bad news comes in an update today. Helpfully, the figures are quantified, but further insight can be gained with comparison to the previous warning.
For the year ended 31 December 2018, sales are now expected to be approximately GBP37.6m (2017: GBP54.3m) and the underlying operating loss(1) is expected to be approximately GBP2.0m (2017: underlying operating profit of GBP4.7m). 2018 was a year of significant disruption and distraction for the Company which has been well documented in previous announcements.
Referring back to previous guidance, the board had guided this loss as ‘up to £0.5m’, so this is a big miss. But it gets worse:
Underlying expected operating loss in 2018 of GBP2.0m is before exceptional charges of GBP3.6m (further details of which are set out below) and a share-based payments charge of GBP0.1m (2017: underlying operating profit of GBP4.7m is stated before an exceptional charge for the settlement agreement with BRK of GBP3.8m and a share-based payments charge of GBP0.4m).
Another £3.6m exceptional charge is massive, and it turns out this is a mixture of cash and non-cash: provisions against stock £1.1m, ramp-up costs £0.9m, restructuring costs £1.6m.
The first two are quite easy to understand, the third has a bit more of an explanation:
In line with its previously announced strategy to transition from a hardware safety products provider to a more integrated safety solutions provider, the Company has taken action to move from a traditional distributor model to more value-added reseller partnerships in its distribution channels for both its core and connected product ranges. The Board believes that this is key to the Company gaining greater market penetration and generating higher margins.
It remains to be seen whether costs under this would be exceptional or incurred every year.
It is encouraging that FireAngel are changing with the market: the ‘core and connected’ products it refers to relates to standalone alarms and the newer generation of internet-connected alarms, the latter of which offer far greater usage possibilities and data gathering possibilities.
Unfortunately, there isn’t any type of proprietary technology in these products, and there are many companies offering fire alarms or carbon monoxide detectors. On the retail side, it is very difficult to actually perceive quality of the products (as in the majority of cases the product will never be used). And in terms of the connected products, start-ups have made rapid progress in the field, who can typically move faster than a larger company.
However, we should focus on the underlying business here. It does seem that with sales of £37.6m, there is a large drop on the previous year, and in some senses a new start. The culprit of the drop is the cessation of the previous agreement with BRK, but this also has decimated profits. FireAngel paid a hefty royalty fee of £2.0m, but overall this was a source of profit for the group.
One thing that wasn’t pointed out before was the lumpy nature of sales. From the annual report:
With a move to a different model this reliance on a few customers may increase.
One concern is cash. The cash at year end was £3.3m together with a small working capital surplus. That position has heavily deteriorated as revealed in the update:
The Company has operated within its banking facilities throughout the year. Net debt at 31 December 2018 was GBP4.7m (31 December 2017: net cash of GBP3.3m).
This is slightly worrying. Operating within banking facilities is a nothing comment, because it would be extremely alarming if it had not. The debt facility shows as follows
More ominously, this goes on to state:
The RCF has covenants which have been agreed with HSBC and are tested at quarterly intervals on a rolling twelve months basis. The Board
considers that, even on a “worst case” basis, it expects the Group to remain comfortably within these covenants throughout the term of the
Given that how events have unfolded are now much worse than anticipated (as that statement is over a year old), could we be at worse case already? There are no mentions at what the covenants are, but seeing as on every metric there will be a loss last year, they may be sailing close to the wind.
I do suspect that on another poor year this might need to re-negotiated, although in typical fashion the board are bullish about the prospects for the coming year.
It has been a disaster for investors here since the company IPO’d, and it is hard to point the finger of blame anywhere but the board. The cash position has decreased massively and has swung into a debt position, being used for capex and dividends. The acrimonious departure of a major partner caught them short and the company is suffering as a result. A move to embrace new technology has seen a large increase in intangibles, with the company spending on product development and software costs.
The conversion of these down to the bottom line seems extremely slow, in the past year the company was sitting on something like £11m of stock – an extremely high figure considering that the lead time for these devices can be extremely quick. The accounts do not present a pretty picture at all.
A change in operations away from distributor to re-seller relationships focusing on the new technology feels like a last roll of the dice here. Adding value to the end product would need further investment and cash is not plentiful, and even an equity raise would not get very far.
This was rated 2/5 initially but I would think with today’s update the uncertainty must have increased and the window of success has gotten smaller. There can be no more problems this year. I can see the attraction in it to investors: this could have been a decent company, but it obviously is not at present and has some way to go before it can be regarded as such.