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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.
Written by
Richard Jeans
Brady |
Building the business for a brighter future |
Final results |
Software & comp services |
15 April 2019 |
Share price performance
Business description
Next events
Analysts
Brady is a research client of Edison Investment Research Limited |
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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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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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Research: Investment Companies
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