Building the business for a brighter future

Brady 15 April 2019 Update
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Brady

Building the business for a brighter future

Final results

Software & comp services

15 April 2019

Price

58p

Market cap

£48m

Net cash (£m) at 31 December 2018

4.1

Shares in issue

83.4m

Free float

68%

Code

BRY

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.1)

(9.7)

(2.5)

Rel (local)

(5.7)

(15.8)

(4.3)

52-week high/low

68.3p

56.5p

Business description

Brady is the largest Europe-based E/CTRM player. It provides a range of transaction and risk-management software applications, which help producers, consumers, financial institutions and trading companies manage their commodity transactions in a single, integrated solution.

Next events

AGM

June 2019

Interim results

September 2019

Analysts

Richard Jeans

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Brady is a research client of Edison Investment Research Limited

The last two years have seen a significant streamlining of the cost base and a focus on delivering on several significant legacy contracts, which will be completed in FY19. There has also been significant investment in product in FY18 (R&D was 30% of sales). Carmen Carey took on the CEO role in February and management is now looking to exploit the benefits of the streamlining and investment, with an increasing emphasis on new sales. The market opportunity is substantial and we believe Brady is well positioned to benefit from the significant sector consolidation.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17**

22.2

(2.9)

(5.7)

0.0

N/A

N/A

12/18

23.2

0.3

0.0

0.0

N/A

N/A

12/19e

24.3

1.0

0.9

0.0

62.8

N/A

12/20e

25.5

2.0

1.8

0.0

31.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excludes recycling business and restated for IFRS 15.

FY18 results: Respectable 5% organic growth

Revenue grew by 4% to £23.2m, held back by a 1% currency headwind. This was respectable given the focus was on account management rather than winning new clients. The gross margin expanded from 56% to 60%, reflecting a higher licence revenue element in the product mix. EBITDA (Brady basis) swung from a £0.3m loss in FY17 to a £2.6m profit. The group ended the year with cash of £4.6m and £0.5m of finance leases, leaving net cash of £4.1m, which is steady with end FY17. This was c £1m lower than expected as two projects took a little longer to complete and £1m for the projects was received in the first week of February. The group spent £7m on R&D in FY18, of which £2.9m was capitalised, reflecting new product launches including a tolling module. The CTRM fast start was launched in FY18 and the first solution has been sold and implemented. Brady is contesting a claim from the Norwegian tax authorities, which goes back to 2013, that its Norwegian IP was transferred to the UK. However, an invoice for £2.6m has been received (of which Brady has already provided £1.6m) and cash payments of £2m are expected to be made in FY19 with another £0.6m in FY20.

Forecasts: Sales eased, FY20 EBITDA maintained

We have eased our revenue forecasts by 2% in FY19 and 3% in FY20 and have increased our capitalised development forecasts. We have cut our near-term profit forecasts, but broadly maintained FY20 gross profit and EBITDA. We forecast net cash to slip to £2.7m at end-FY19, after the Norwegian tax payments and after receiving the £1m final payment for its disposed recycling business. We forecast the business to be comfortably cash generative from FY20.

Valuation: Well positioned in a consolidating sector

The streamlining and investment pave the way for scaling up the business, with the valuation upside resting on the shift to new technologies such as microservices and the cloud. If Brady could take a 5% market share and generate 20% operating margins, it would suggest c 400% upside if the stock traded on c 10x earnings.

Forecasts: Revenues eased, profits cut, but gross margins trending higher and FY20 EBITDA maintained

We have conservatively eased our revenue forecasts by 2% in FY19 and 3% in FY20 to reflect slightly less aggressive growth targets, which equate to 5% organic revenue growth. We have introduced FY21, and forecast growth to accelerate to 7% in FY21, reflecting the significant investment in new product. Near-term growth will be helped by the group’s new tolling module, which went live with one client late in FY18, and at least one more client is expected to take the module this year. Tolling agreements are contracts to deliver a certain type, grade or specification of the commodity to a processor, and receive back refined, part-refined or processed material, in exchange for a fee. Brady’s tolling module supports these complex contracts. The new module gives Brady an edge over the competition through combining it with Brady’s concentrates module.

We have amended the revenue mix, with licence revenues declining at a slower rate due to the legacy projects completing in FY19 and the recent product launches, which we forecast will generate traditional licence revenue. Nevertheless, we still forecast recurring revenue to rise from 69% of the total in FY18, to 72% in FY19, 74% in FY20 and 75% in FY21, which reflects growth in cloud and software rental revenues.

We forecast £7.1m is spent on R&D in FY19 (29% of sales), of which £3m is capitalised. We forecast R&D/sales ratios to decline to 27% in FY20 and to 25% in FY21 with the capitalised component falling to £2.5m and £2.0m respectively.

We forecast gross margins to rise to 61% in FY19, 63% in FY20 and 64% in FY21 as the business gains scale. However, the gross profit eases slightly on the revenue cuts and this feeds through to the profit lines, with EPS coming back by 23% in FY19 and by 4% in FY20.

We forecast net cash to slip to £2.7m at end-FY19, after the Norwegian tax payments and after receiving the £1m final payment for its disposed recycling business. We forecast the business to generate free cash flow of £0.9m in FY20 rising to £2.8m in FY21 and for net cash to rise to £3.6m and £6.4m respectively. We do not forecast any dividends over the next three years.

Exhibit 1: Forecast changes

Old

Actual

Change

Old

New

Old

New

New

Revenue (£'000s)

2018e

2018

(%)

2019e

2019e

2020e

2020e

2021e

Licence revenues

3,500

3,358

(4)

1,890

2,810

49

1,527

2,363

55

2,502

Recurring fees (s/w rental, hosting, support)

16,000

16,031

0

18,592

17,458

(6)

20,150

18,837

(7)

20,399

Services and development

4,224

3,768

(11)

4,435

4,051

(9)

4,657

4,253

(9)

4,338

Group revenue

23,724

23,157

(2)

24,917

24,319

(2)

26,334

25,453

(3)

27,239

Growth (%)

6.5

4.2

(35)

5.0

5.0

(0)

5.7

4.7

(18)

7.0

Cost of sales (before dev cost capn)

(10,504)

(10,207)

(3)

(9,781)

(10,434)

7

(9,819)

(9,611)

(2)

(9,395)

Capitalisation of dev'ment costs (net)

1,032

957

(7)

53

935

1,659

(287)

196

(168)

(411)

Gross profit

14,252

13,907

(2)

15,189

14,821

(2)

16,228

16,038

(1)

17,433

Gross margin (%)

60.1

60.1

 

61.0

60.9

 

61.6

63.0

 

64.0

Selling & administrative expenses

(13,557)

(13,222)

(2)

(13,583)

(13,511)

(1)

(13,784)

(13,619)

(1)

(13,986)

Adjusted EBITDA

694

685

(1)

1,606

1,310

(18)

2,444

2,419

(1)

3,447

Depreciation

(350)

(367)

5

(350)

(350)

0

(393)

(450)

15

(364)

Adjusted operating profit

344

318

(8)

1,256

960

(24)

2,051

1,969

(4)

3,083

Operating profit margin (%)

1.5

1.4

 

5.0

3.9

 

7.8

7.7

 

11.3

Growth (%)

(112.0)

(110.8)

 

265.0

201.8

 

63.3

105.2

 

56.6

Net interest

(10)

(42)

320

30

30

0

60

45

(25)

60

Profit before tax (norm)

334

276

(17)

1,286

990

(23)

2,111

2,014

(5)

3,143

Amortisation of acquired intangibles

(1,270)

(1,283)

1

(1,270)

(1,283)

1

(1,270)

(1,283)

1

(1,283)

Share-based payments

(150)

137

(191)

(400)

(400)

0

(500)

(500)

0

(600)

Exceptional items

0

(274)

 

0

0

 

0

0

 

0

Profit before tax

(1,086)

(1,144)

5

(384)

(693)

81

341

231

(32)

1,260

Normal tax charge

(67)

(271)

305

(283)

(218)

(23)

(507)

(483)

(5)

(754)

Other tax charge

0

(393)

 

 

 

 

 

 

 

 

Profit after tax

(1,153)

(1,808)

57

(667)

(911)

37

(165)

(252)

53

506

Adjusted EPS (p)

0.3

0.0

(98)

1.2

0.9

(23)

1.9

1.8

(4)

2.8

P/E – adjusted EPS (x)

 

N/A

 

 

62.8

 

 

31.8

 

20.5

Adjusted EBITDA (Edison)

694

685

(1)

1,606

1,310

(18)

2,444

2,419

(1)

3,447

Add: Amortis’n of capitalised dev’ment

2,100

1,943

(7)

2,189

2,065

(6)

2,278

2,304

1

2,411

EBITDA (Brady definition)

2,794

2,628

(6)

3,796

3,374

(11)

4,722

4,724

0

5,858

Source: Brady (historicals), Edison Investment Research (forecasts).

Exhibit 2: Financial summary

£'000s

2016

2017

2018

2019e

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

25,373

22,215

23,157

24,319

25,453

27,239

Cost of Sales

(9,804)

(9,852)

(9,250)

(9,498)

(9,415)

(9,806)

Gross Profit

15,569

12,363

13,907

14,821

16,038

17,433

EBITDA

 

 

1,910

(2,643)

685

1,310

2,419

3,447

Adjusted Operating Profit

 

 

1,290

(2,941)

318

960

1,969

3,083

Amortisation of acquired intangibles

(1,618)

(1,559)

(1,283)

(1,283)

(1,283)

(1,283)

Exceptionals items

(2,128)

(2,441)

(274)

0

0

0

Share based payments

(90)

(9)

137

(400)

(500)

(600)

Operating Profit

(2,546)

(6,950)

(1,102)

(723)

186

1,200

Net Interest

3

(22)

(42)

30

45

60

Profit Before Tax (norm)

 

 

1,293

(2,963)

276

990

2,014

3,143

Profit Before Tax (FRS 3)

 

 

(2,543)

(6,972)

(1,144)

(693)

231

1,260

Tax

(188)

127

(664)

(218)

(483)

(754)

Discontinued items

878

(1,922)

(271)

0

0

0

Profit After Tax (norm)

1,992

(4,721)

5

772

1,531

2,389

Profit After Tax (FRS 3)

(1,853)

(8,767)

(2,079)

(911)

(252)

506

Average Number of Shares Outstanding (m)

83.0

83.3

83.4

83.6

84.0

84.4

EPS – normalised (p)

 

 

2.4

(5.7)

0.0

0.9

1.8

2.8

EPS – FRS 3 (p)

 

 

(2.2)

(10.5)

(2.5)

(1.1)

(0.3)

0.6

Dividend per share (p)

0.00

0.00

0.00

0.00

0.00

0.00

EBITDA Margin (%)

7.5

(11.9)

3.0

5.4

9.5

12.7

Adjusted Operating Margin (%)

5.1

(13.2)

1.4

3.9

7.7

11.3

BALANCE SHEET

Fixed Assets

 

 

37,035

27,001

27,285

27,037

25,754

23,968

Intangible Assets

35,999

26,091

26,449

26,101

25,014

23,320

Tangible Assets

978

487

746

846

650

558

Deferred tax

58

423

90

90

90

90

Current Assets

 

 

14,640

14,724

10,227

9,143

10,304

13,554

Stocks

0

0

0

0

0

0

Debtors

7,297

4,787

5,600

5,881

6,155

6,587

Cash

7,343

4,089

4,627

3,262

4,149

6,967

Other current assets

0

5,848

0

0

0

0

Current Liabilities

 

 

(12,669)

(14,927)

(12,252)

(12,365)

(12,461)

(12,709)

Creditors

(12,669)

(13,543)

(12,019)

(12,132)

(12,228)

(12,476)

Short-term borrowings

0

0

(233)

(233)

(233)

(233)

Other current liabilities

0

(1,384)

0

0

0

0

Long-Term Liabilities

 

 

(5,670)

(4,593)

(4,322)

(4,322)

(4,322)

(4,322)

Long-term borrowings

0

0

(296)

(296)

(296)

(296)

Other long-term liabilities

(5,670)

(4,593)

(4,026)

(4,026)

(4,026)

(4,026)

Net Assets

 

 

33,336

22,205

20,938

19,494

19,276

20,491

CASH FLOW

Operating Cash Flow

 

 

2,737

(316)

1,002

3,253

4,596

5,722

Net Interest

3

(22)

(251)

30

45

60

Tax

(428)

247

(73)

(2,198)

(1,000)

(691)

Capex

(2,167)

(2,806)

(3,289)

(3,450)

(2,755)

(2,272)

Acquisitions/disposals

(326)

0

2,936

1,000

0

0

Financing

47

190

0

0

0

0

Dividends

0

0

0

0

0

0

Net Cash Flow

(134)

(2,707)

325

(1,365)

887

2,818

Opening net debt/(cash)

 

 

(6,594)

(7,343)

(4,089)

(4,098)

(2,733)

(3,620)

Other

883

(547)

(316)

0

0

()

Closing net debt/(cash)

 

 

(7,343)

(4,089)

(4,098)

(2,733)

(3,620)

(6,438)

Source: Brady (historicals), Edison Investment Research (forecasts). Note: IFRS 9 and IFRS 15 have been applied from FY17. FY17 excludes the recycling business.

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This report has been commissioned by Brady and prepared and issued by Edison, in consideration of a fee payable by Brady. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Brady and prepared and issued by Edison, in consideration of a fee payable by Brady. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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