FireAngel – No Phoenix

FireAngel (FA.) issue a trading update for their full-year to 2019.

FireAngel trading updates do tend to come later than for other companies raising questions about management controls, but today the delay is understandable. Not only does bad news take longer to prepare, the various exceptional items would have taken significant judgement to quantify and even to determine which period they should fall into. Especially given the increased caution of auditors previously discussed here, shareholders should also consider the risk that the final results could be delayed beyond even the end of March that they have been used to and which is flagged today.

To take each item in turn:

• Revenue was strong, reflecting once again the underlying strength of their markets and unique position within UK retail.
• Their claimed underlying profitability is exceptionally weak, with losses worse even than the previous year, reflecting their ongoing severe execution problems, including manufacturing and distribution.
• There is confusion over the treatment of historical poor investment decisions and of historically optimistic accounting treatment. They had previously announced increased amortisation of development costs and today say this is as expected. Yet they also write off an unspecified amount (totaling to £3.2m with stock provisions) of development costs. Normally you would expect depreciation to be lower after a write-off.
• There is confusion over historic battery recall costs. They initially say that these are £1.4m as expected. They then say that they are making a further provision of £2.7m. Furthermore, recent reviews on Amazon and elsewhere strongly suggest that the battery issue is ongoing with current units, while the lack of response by the company means many customers are disposing of their in-warranty alarms rather than getting replacements.
• Statutory losses look to be in the same order of magnitude as their market capitalisation.
• Very belatedly, and following years of having too much stock of some items and too little of others leading to stock write-downs, urgent air freighting and rework costs, they are reducing the number of manufactured SKUs.
• There is confusion over the success of the connected home strategy, with the company simultaneously saying that “several” live installations prove it correct while writing down the related investment.
• They are investigating what they claim are historical quality control issues related to units manufactured in China. They say that these do not affect Polish manufactured units. Yet, their Amazon reviews show significant numbers of “dead on arrival” units and sampling of actual product indicates ongoing quality and design issues. Their complete absence of engagement with Amazon reviewers suggests they have little interest in getting to the bottom of this.
• They say they have “operated within its banking facilities throughout the year”. But both their level of debt and profits are higher than this time last year, a situation that precipitated a rescue fundraising last March. While they make extensive use of cheap and covenant-light invoice discounting, they may also be making use of their overdraft facility.

It is my opinion that the company is now financially stressed and furthermore has ongoing product quality issues. The best news in today’s update is the increase in revenue (over last year) and planned reduction of SKUs. However, their cash cow has long been their near-exclusive relationship with Kingfisher (B&Q and Screwfix in the UK), yet with less SKU coverage, fears over financial stability and apparently high return levels this cannot be taken for granted.

Three months ago FireAngel looked like they would need to raise more money to provide working capital and customer comfort if they managed to win one of their long-trailed major B2B contracts. Now it looks like they need further cash just to survive. But with all the money (and more) from the previous fund-raising gone and the outlook if anything looking worse, it is difficult to see where this would come from.

Investors may be hoping for a takeover from their competitor BRK / Newell who owns 23%, but conglomerate strategy / politics may prevent this whatever the logic, and BRK may reason it is better to buy them out of administration rather than take on their debt. Otherwise some kind of convertible loan may be appropriate as this would give the lender greater control and security than providing yet more equity finance.

Either way the equity of the company appears to have zero intrinsic value, leaving only some residual option value in the event of a sudden run of good luck or a takeover battle.