Brady — Update 16 December 2015

Brady — Update 16 December 2015

Brady

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Brady

Contract deferrals

Trading update

Software & comp services

17 December 2015

Price

49p

Market cap

£41m

Net cash (£m) at 30 June

6.2

Shares in issue

83.0m

Free float

77.8%

Code

BRY

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(40.1)

(46.7)

(28.8)

Rel (local)

(39.5)

(45.5)

(27.6)

52-week high/low

109.5p

41.2p

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

Trading update

January 2016

Final results

March 2016

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

In its recent update, Brady said that it was seeing a lengthening of sales cycles, due to a deterioration of market conditions in the commodity sector. Consequently, FY15 revenues and EBITDA will be materially below market expectations. While volatile commodity prices can help to drive software sales, the commodity selloff has been persistent and severe as to force restructurings across the commodity trading sphere, and hence players are deferring deals and conserving cash. Nevertheless, Brady says the deals have been deferred rather than cancelled, and as participants require modern software for their business processes, a bounce back in FY16 with a stabilising commodity sector looks fair in our view.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

29.4

2.5

2.8

1.7

17.6

3.5

12/14

31.0

5.1

5.3

1.9

9.2

3.8

12/15e

27.4

0.9

1.0

2.0

49.0

4.0

12/16e

29.0

3.4

3.3

2.1

14.8

4.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading update: Deals deferred, not cancelled

While Brady had c 17 deals in its pipeline at the time of its H1 results in September, only seven have converted into sales. This includes several attractive cloud deals, which will add to the group’s c 55% recurring revenue run rate. The main fallbacks are in the Commodity division where commodity traders, which represent around a half of the group’s target market, have been struggling due to the extremely weak commodity prices. The Recycling unit has also suffered – Sims Metal Management (ASX:SGM), the world’s largest recycling company, released a profits warning in early November due to a sharp deterioration in market conditions. Following Brady’s H1 results, we reported that Sims had selected Brady to further support managing its global recycling operations, with a roll-out beginning in Australia. We understand this roll-out has been deferred into FY16. While the Norway-based Energy business has been making progress, the NOK has fallen c 10% against the pound this year, and is down by a third from its peak in 2012.

Forecasts: Conservatively cut in both FY15 and FY16

Brady has said it will cut its costs by £1.7m, which we understand will mainly come from a combination of staff costs and the trimming of management. We have assumed that restructuring costs of £0.5m will be charged in FY15, and expensed in FY16. In all, EPS falls by 82% in FY15 and 48% in FY16, while FY15 year-end net cash comes back from £11.2m to £5.0m, which includes a conservative assumption on working capital outflows in FY15.

Valuation: 10x FY16 earnings when adjusted for cash

Brady trades on c 14x our cash-adjusted FY16 EPS, 1.2x EV/sales and c 9.2x EV/EBITDA. We note that Brady bounced back in FY14 from a disappointing FY13, and the shares now look undervalued if it can stage a similar recovery in FY16.

Forecasts

In September, management stated that the group had 80% of FY15 revenues in the bag. At that time, Brady had c 17 deals in its pipeline, and more than double that number in prospects. However, it has been a challenge to convert the pipeline with only seven sales since then. This reflects the deteriorating commodity markets with commodity indices at multi-year lows and scrap metal prices hammered since August in wake of the Chinese market sell-off.

The group finished H1 with £6.2m cash, which had risen to c £7.5m at the end of July. The acquisition of ScrapRunner in September absorbed c £1.2m and cash was in excess of £4m at the time of the trading update last week. The group has no debt. Licences are typically sold at the end of H1 and H2 as budgets are used up. December is usually the most cash-generative month, so we expect the cash position to improve by the year end.

Brady has been building its recurring revenues, which represent c 55% of total revenues, and constitute rental revenues (mainly from the Energy unit), maintenance (relating to term licences) and hosting fees (relating to the cloud solution). Nevertheless, the business is still quite lumpy, and Brady is reliant on high-margin term licence sales to make up revenues and boost profitability. If commodity prices remain subdued, there clearly is a risk of further deferrals in FY16. However, the group is streamlining its cost base and we would expect some deal flow from the pipeline unless there is a broader economic malaise resulting in more general pressure on IT budgets. This is because commodity firms need to maintain their IT systems and the group also sells to fabricators and consumer product companies, which benefit from lower commodity prices.

We have reduced our revenue forecasts by £5.9m in FY15 to £27.4m and by £6.6m in FY16 to £29.0m. Brady has said it will cut its costs by £1.7m and we have assumed that restructuring costs of £0.5m will be charged in FY15, with the cash utilised in FY16. Our PBT (norm) falls by £4.7m in FY15 to £0.9m and by £3.0m in FY16 to £3.4m, while EPS falls by 4.7p in FY15 to 1.0p and by 4.0p in FY16 to 3.3p. FY15 year-end net cash comes back from £11.2m to £5.0m, which includes a conservative £1.6m assumption on working capital outflows in FY15, along with the recent £0.25m share buyback. The net cash position eased to £4.9m a year later, on our forecasts. We are maintaining our dividend forecasts, which imply a 4.0% yield for FY15, rising to 4.3% in FY16.

Exhibit 1: Forecast changes

Revenue (£m)

PBT (norm, £m)

EPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015e

33.3

27.4

(18)

5.6

0.9

(84)

5.7

1.0

(82)

2016e

35.6

29.0

(19)

6.4

3.4

(39)

6.3

3.3

(40)

Source: Edison Investment Research

We note that since the trading news, Kestrel Partners, Brady’s largest shareholder, increased its stake from 14% to 20%, while Investec has reduced its stake from 8% to 4%.


Exhibit 2: Financial summary

£'000s

2011

2012

2013

2014

2015e

2016e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

19,155

28,136

29,355

31,015

27,408

29,016

Cost of Sales

(9,323)

(10,063)

(11,119)

(10,977)

(9,837)

(10,560)

Gross Profit

9,832

18,073

18,236

20,038

17,570

18,456

EBITDA

 

 

3,653

5,440

3,122

5,592

1,433

3,852

Adjusted Operating Profit

 

 

3,241

4,924

2,470

5,019

890

3,277

Amortisation of acquired intangibles

(616)

(1,276)

(1,613)

(1,613)

(1,613)

(1,613)

Exceptionals items

(326)

(2,563)

355

(2,143)

(500)

0

Share based payments

(269)

(345)

(313)

(232)

(250)

(275)

Operating Profit

2,030

740

899

1,031

(1,473)

1,389

Net Interest

68

64

29

58

40

80

Profit Before Tax (norm)

 

 

3,309

4,988

2,499

5,077

930

3,357

Profit Before Tax (FRS 3)

 

 

2,098

804

928

1,089

(1,433)

1,469

Tax

(162)

(345)

189

(630)

(139)

(587)

Profit After Tax (norm)

3,147

4,643

2,249

4,315

790

2,770

Profit After Tax (FRS 3)

1,936

459

1,117

459

(1,573)

882

Average Number of Shares Outstanding (m)

54.2

75.6

80.9

81.3

82.5

83.6

EPS – normalised (p)

 

 

5.8

6.1

2.8

5.3

1.0

3.3

EPS – FRS 3 (p)

 

 

3.6

0.6

1.4

0.6

(1.9)

1.1

Dividend per share (p)

1.50

1.60

1.70

1.85

1.95

2.10

Gross Margin (%)

51.3

64.2

62.1

64.6

64.1

63.6

EBITDA Margin (%)

19.1

19.3

10.6

18.0

5.2

13.3

Adjusted Operating Margin (%)

16.9

17.5

8.4

16.2

3.2

11.3

BALANCE SHEET

Fixed Assets

 

 

16,859

42,851

39,137

32,614

34,304

34,583

Intangible Assets

16,002

40,999

37,519

30,996

31,626

30,741

Tangible Assets

857

1,158

983

1,076

2,136

3,300

Deferred tax

0

694

635

542

542

542

Current Assets

 

 

15,513

16,874

15,420

16,948

12,456

12,526

Stocks

0

0

0

0

0

0

Debtors

5,209

9,036

8,198

7,368

7,419

7,650

Cash

10,304

7,838

7,222

9,580

5,037

4,876

Current Liabilities

 

 

(6,283)

(11,401)

(11,200)

(10,545)

(9,030)

(9,239)

Creditors

(6,283)

(11,401)

(11,200)

(10,545)

(9,030)

(9,239)

Short-term borrowings

0

0

0

0

0

0

Long-Term Liabilities

 

 

(2,138)

(6,717)

(4,467)

(4,651)

(4,651)

(4,651)

Long-term borrowings

0

0

0

0

0

0

Other long-term liabilities

(2,138)

(6,717)

(4,467)

(4,651)

(4,651)

(4,651)

Net Assets

 

 

23,951

41,607

38,890

34,366

33,079

33,220

CASH FLOW

Operating Cash Flow

 

 

3,000

1,459

4,277

6,209

815

4,452

Net Interest

68

64

29

58

40

80

Tax

(161)

(168)

(378)

(420)

(600)

(470)

Capex

(1,695)

(2,374)

(2,442)

(2,419)

(2,535)

(2,466)

Acquisitions/disposals

(1,853)

(17,983)

(751)

0

(1,180)

(66)

Financing

188

17,780

125

338

441

0

Dividends

(759)

(1,206)

(1,296)

(1,378)

(1,525)

(1,690)

Net Cash Flow

(1,212)

(2,428)

(436)

2,388

(4,543)

(160)

Opening net debt/(cash)

 

 

(11,614)

(10,304)

(7,838)

(7,222)

(9,580)

(5,037)

Other

(98)

(38)

(180)

(30)

0

()

Closing net debt/(cash)

 

 

(10,304)

(7,838)

(7,222)

(9,580)

(5,037)

(4,876)

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

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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Research: Industrials

Cohort — Update 16 December 2015

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