Brady
Written by
Brady |
Contract deferrals |
Trading update |
Software & comp services |
17 December 2015 |
Share price performance
Business description
Next events
Analysts
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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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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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