Chat with Graham Whitworth of FireAngel FA. at Mello London

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I was going to Tweet out my thoughts about this but decided it might be better to just to do a small Blog on it and that way I could be more flowing in my scribbles and of course I can just Tweet out a Link anyway.

On Tuesday 27th November 2018 I was at the excellent Mello Investor Show in Chiswick for the Afternoon and into the Evening and although I spent pretty much all my time socialising with various Twitter Mates and some Investors who I had not met before, I did have an intention to speak with FireAngel to try and understand what was really going on and if there was any hope here.

After the obligatory Pint of London Pride and a nibble on a Sarnie, I headed down to the Exhibition area with my mate Jon of @BriefedUp and Matylda fame, and we parked ourselves with menaces at the FireAngel Stand. We met with Graham Whitworth who has been the Chairman for 18 Years and also the Product Development Manager, Nick Rutter, turned up but we did not speak with him. There was another helpful Chap there who told us a lot about the Products.

No doubt I have mentioned this many times before but I tend to rock up to a Company Stand at such Events and have a substantial and lengthy discussion - I would rather only speak to 1 or 2 Companies in extreme depth rather than to roll around loads and loads of Companies and just end up asking superficial and often rather pointless questions. Quite often before an Event if I have the time, I will look through the List of Companies attending and I will choose the ones I want to meet with and I will do some quick Research into them so I have a basic understanding even of the ones that are fairly new to me.

Of course with FireAngel I know it rather too well, having held it for many Years and after some wonderful gains in the early Years, of late it has been very frustrating. Of course this was the first point I had to raise with Graham and he very much feels the pain because he has a large Shareholding (3.52m Shares according to SharePad) and although he will be leaving as Chairman very soon, he says he has no intention of Selling his Shares and makes the point that he would be daft to sell them so low. He explained that he has always been an Investor and in fact that was how he got into FireAngel in the first place when he initially Invested when SprueAegis was spun out of AEA Technology or something like that (it was part of the Harwell Nuclear Establishment because the Smoke Detectors had a Radioactive aspect to them !!). He is due to remain on the Board for another year and he is leaving because of Retirement as he is 65. He said they are looking for another Chairman but I got a very clear sense that they actually have someone lined up.

We then went through the History of Sprue Aegis and the Good times and the Bad times which was useful in that it helped fill in some background that I was unaware of but the other big benefit is that such discussions help to loosen up the Conversation and building a good rapport with Directors is always useful if you really want to get some useful insights into what is actually going on. I have often seen Investors at such Shows being really aggressive or even rude with Directors and suchlike and I think that is plain daft - apart from the fact that I would never talk to people in such a way, it is just counter-productive and you will just get their backs up. Crazy.

It has been the case of late that I felt the problems were clearly around the Supply Side of the Business and not on the Demand Side - this is demonstrated by the fact that even with the recent awful problems in getting Stock from the new Poland Factory, they should still manage to generate Revenue of £38 Million if Forecasts are hit for this Year. Therefore my big focus was to dig into the Supply situation and try to get a solid understanding of what was happening now and how they could address the Demand which I see as pretty robust.

We talked about the recent Profit Warning and something I picked up was that the Board held a Meeting shortly before issuing the Warning and I think Graham’s words were something like “We could see that the Salespeople were stretching to meet the Targets” and I got a very distinct impression (rightly or wrongly !!) that it was touch and go as to whether or not they could hit the Targets and they erred on the side of caution and decided to put a Warning out. This suggests to me that if they had stuck to the original timeline etc. then they might have been pretty near hitting the forecasts.

I asked Graham about the Chinese Factory move of a couple of Years ago or whatever it was, and my angle was that this had been done so smoothly that I had naively expected the Poland Factory Start-up to be similarly well managed. He explained that lifting up a Factory that already exists in a place like China (where Planning Laws etc. are a lot easier) and in effect plonking it across the Road (or Train Track in this case !!) is actually hugely simpler because you don’t have all the Tooling work and Configuring and Optimisation of Production etc. that the new Factory requires.

This brought some more insights - I got the impression that Sprue Aegis was talking with Flex behind the scenes for 2 Years before it became Public and they were doing small Pilot Runs of Production of specific Smoke Alarm Products or whatever and he did not specifically say this but I certainly got a sense that BRK had found out about their intent to move Production to Poland and this could have been a factor in the relationship breaking down so badly. On that point, there was a clear bitterness from Graham regarding how the BRK relationship had gone sour but of course that is entirely understandable.

While we are on the Manufacturing bit, I will just add in that Graham said they now have all the Product they need being delivered and he gave an example of one of the Commercial Products where they needed something like 17,000 Units but the Factory had now made 28,000. He then went on to say that the problem now was around Cost of Production and that they were focused on Optimising the Production Runs to get Costs down and this would take 3 months to complete which strikes me as not very long but of course it is exactly what Shareholders want to see because if Revenues can rise on more Production to fulfil Demand and Costs can come down, then it should drive Profits and Cash.

Something else that came up was around the number of Products they have. I forget the precise Numbers but that doesn’t matter anyway - the point is that the Chinese Factory was knocking out something like 450 different Products and Variants but they had got this down to 250. There are some twists on this - despite all the wonderful Benefits that the EU brings to UK Exporters (sarcasm or what !!??) it turns out that each European Country that FireAngel tries to sell into has different Certification Requirements and they have to get the Products tested by Local Authorities. The advantage of this is that it is costly to do (something like £100k a product) but it creates a Barrier to Entry (Economic Moat if you like) as it is difficult for Competitors to replicate this. I think there was also something about them having 125 Patents as well.

I am losing the flow of our discussion now but something else I remember was Graham stressing the importance of the new Social Housing Smoke Alarms and CO Detectors and stuff with the Control Panel and ability for Tenants in Homes to raise requests for Service and other stuff through the Panel. He said they were working on several Tenders and mentioned one for UAE which was worth £250m but obviously if FireAngel were to win they would only get a small part of this but it could be significant when you consider the size of FireAngel.

He also mentioned the problems of Stock Outages at B&Q a while back which our mate Gordon @Glasshalfull1 had flagged up and he said this was because B&Q use Automatic Stock Re-order Systems and I understand it in effect orders Stock based on what was Supplied the Week before and the System is of course too stupid to realise that when they changed from the BRK Brands to the FireAngel Brands there was a Supply Pause and the Automatic System didn’t re-order any !! This makes sense as we used to get similar issues in my Retail Days although I find it depressing that ‘modern’ Systems are still making such basic errors !! Graham also added that they have very good relationships with the Outlets like B&Q, Screwfix, Homebase etc. We also discussed the potential of the Connected Devices but I can’t really remember much about this bit !!

I spoke with Gordon a bit more today and he flagged up some particular factors that are keeping him keen which were pretty much as follows:

• Potential of the Connected Home large Tenders - just a few Wins could dramatically improve the Company’s finances.
• New Management that have been brought in (and likely to be brought in !!) being chosen with the help of Downing Fund Managers who have 10% of the Shares.
• Possibility of a Takeover - they have spent £15m creating the Portfolio of Connected Devices and for a Market Cap today of £18.8m the attraction is obvious from this alone (further down I look quickly at the Forecast EPS numbers). Note BRK still own 23.4% of the Shares and perhaps they will launch a Bid again (obviously Hostile !!) but of course on the flipside it means there is quite a Share Overhang if they decide to exit their Position.

Oh, they did a Presentation later in the Day and I intended to go to that but I got distracted in the Bar again. If I get a look at it I will probably Tweet out anything I find of particular interest although I think I covered the Key bits in my discussion with Graham.

At the Mello Event I picked up some of the Paperwork FireAngel had lying on their Table and one thing was a ‘Product Selector’ which I had a flick through today. I was amazed by the number of variations of Products (and Prices) that they have on offer - with Connected or not being a big difference and the Battery Life seems to come in lots of choices as well. I was even surprised to see they sell Fire Extinguishers and Fire Blankets although the choice is limited to one of each (I remember often seeing Fire Extinguishers with ‘Sprue Aegis’ written on them in my ‘working’ days.)

It is also worth noting that yesterday they announced they had won a Contract to supply 12,000 Smoke and Heat Alarms to Queens Cross Housing Association in Glasgow, and this consists of Interlinked Connected Alarms which will comply with the forthcoming Scottish Legislation. This is another demonstration of how these big multi-Property Contracts are very suited to FireAngel’s offerings and they are clearly able to win such Deals.

I just had a quick look at SharePad and the Forecast Numbers. For Next Year 2019 they are forecast to do EPS of 2.5p which on the Share Price today of 41p is a Forward P/E of 16.4 and then in 2020 they are forecast to do 5.9p of EPS which gives a 2 Years Forward P/E of 6.9 - obviously these are not expensive Numbers but of course it all depends on them at least hitting the Numbers but I suspect a few more Big Contract Wins would get people excited.

I think that was roughly it but I certainly came away with a feeling that the Supply Issues are now sorted out and the Company has a good chance of getting back on track. However, I would not be Buying any more Shares yet and I would suggest that the best approach is to wait it out and once they produce their next Trading Update, if it is good, then Buy straightaway. I have a Position in them and I am very happy to see how things play out and I suspect the upside here could be significant if they do manage to get a grip.

Cheers, WD.