With the company expecting FY19 revenues of c £19m, c 22% down on our previous forecasts (£24.3m), new sales have slowed markedly since Brady’s last trading update on 30 May. This represents a perfect storm for Brady with it trying to affect a turnaround in the face of significant market and business uncertainties. We have revised our FY19 forecasts and now anticipate a PBT loss of £4.2m in FY19 (previously £1.0m) with FY19 net cash falling from £2.7m to £1.2m net debt. We have withdrawn our FY20/21 forecasts pending further clarification expected with the interim results on 23 September. However, as a market leader in the attractive E/CTRM space, as and when Brady demonstrates renewed sales momentum it should become an attractive investment on an FY19 EV/sales multiple of 1.5x.
Written by
Brady |
Perfect storm as sales stall, forecasts revised |
Trading update |
Software & comp services |
23 August 2019 |
Share price performance
Business description
Next events
Analysts
Brady is a research client of Edison Investment Research Limited |
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With the company expecting FY19 revenues of c £19m, c 22% down on our previous forecasts (£24.3m), new sales have slowed markedly since Brady’s last trading update on 30 May. This represents a perfect storm for Brady with it trying to affect a turnaround in the face of significant market and business uncertainties. We have revised our FY19 forecasts and now anticipate a PBT loss of £4.2m in FY19 (previously £1.0m) with FY19 net cash falling from £2.7m to £1.2m net debt. We have withdrawn our FY20/21 forecasts pending further clarification expected with the interim results on 23 September. However, as a market leader in the attractive E/CTRM space, as and when Brady demonstrates renewed sales momentum it should become an attractive investment on an FY19 EV/sales multiple of 1.5x.
Year end |
Revenue (£m) |
PBT* |
EPS* |
EV/sales |
P/E |
Yield |
|||||
12/17** |
22.2 |
(3.0) |
(5.7) |
1.07 |
N/A |
N/A |
|||||
12/18 |
23.2 |
0.3 |
0.0 |
1.03 |
N/A |
N/A |
|||||
12/19e |
19.0 |
(4.2) |
(4.0) |
1.54 |
N/A |
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.
Trading update: Sales momentum stalls
In its trading update on 21 August 2019, Brady announced that FY19 revenues would be c £19m, c 22% down on our previous forecasts (£24.3m), due to the pipeline of revenues from new customers ‘maturing’ but not expected to materialise in FY19. Brady noted that recurring revenues are ‘in line with expectations’ and new business bookings are anticipated in H219, although not at the levels previously anticipated. This represents a marked slowdown since the previous trading update on 30 May, attributable to a difficult market environment and elevated business uncertainty. EBITDA guidance was not provided.
Investment case: Clarification pending
In our view, there are a number of factors that may have contributed to the sales slowdown, including the escalating US/China trade war, an increasingly uncertain commodities trading environment, stiffening market competition and uncertainty around Brexit. Although Brady has indicated that new sales leads continue to progress, closing deals appears to have become increasingly problematic and it is not yet clear which of these possible factors is the primary driver. As and when new business is signed, the consequential impact of IFRS 15 is that an ever-smaller proportion of revenues will be recognised in FY19 as the year end approaches.
Valuation: Forecasts revised, EV/sales of 1.5x
Following the update, we now forecast FY19 revenues of £19.0m, with EBITDA loss of £3.9m and loss before tax of £4.2m. Our previous forecasts were for £24.3m of revenues, £1.3m of adjusted EBITDA and PBT of £1.0m. FY19e net cash falls from £2.7m to net debt of £1.2m. When Brady demonstrates renewed sales momentum, it should become an attractive investment on an FY19 EV/sales multiple of 1.5x.
Exhibit 1: Financial summary
£'000s |
2016 |
2017 |
2018 |
2019e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
25,373 |
22,215 |
23,157 |
19,014 |
Cost of Sales |
(9,804) |
(9,852) |
(9,250) |
(9,426) |
||
Gross Profit |
15,569 |
12,363 |
13,907 |
9,588 |
||
EBITDA |
|
|
1,910 |
(2,643) |
685 |
(3,923) |
Adjusted Operating Profit |
|
|
1,290 |
(2,941) |
318 |
(4,273) |
Amortisation of acquired intangibles |
(1,618) |
(1,559) |
(1,283) |
(1,283) |
||
Exceptionals items |
(2,128) |
(2,441) |
(274) |
0 |
||
Share based payments |
(90) |
(9) |
137 |
(400) |
||
Operating Profit |
(2,546) |
(6,950) |
(1,102) |
(5,956) |
||
Net Interest |
3 |
(22) |
(42) |
30 |
||
Profit Before Tax (norm) |
|
|
1,293 |
(2,963) |
276 |
(4,243) |
Profit Before Tax (FRS 3) |
|
|
(2,543) |
(6,972) |
(1,144) |
(5,926) |
Tax |
(188) |
127 |
(664) |
933 |
||
Discontinued items |
878 |
(1,922) |
(271) |
0 |
||
Profit After Tax (norm) |
1,992 |
(4,721) |
5 |
(3,310) |
||
Profit After Tax (FRS 3) |
(1,853) |
(8,767) |
(2,079) |
(4,993) |
||
Average Number of Shares Outstanding (m) |
83.0 |
83.3 |
83.4 |
83.6 |
||
EPS – normalised (p) |
|
|
2.4 |
(5.7) |
0.0 |
(4.0) |
EPS – FRS 3 (p) |
|
|
(2.2) |
(10.5) |
(2.5) |
(6.0) |
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
EBITDA Margin (%) |
7.5 |
(11.9) |
3.0 |
(20.6) |
||
Adjusted Operating Margin (%) |
5.1 |
(13.2) |
1.4 |
(22.5) |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
37,035 |
27,001 |
27,285 |
26,222 |
Intangible Assets |
35,999 |
26,091 |
26,449 |
25,384 |
||
Tangible Assets |
978 |
487 |
746 |
748 |
||
Deferred tax |
58 |
423 |
90 |
90 |
||
Current Assets |
|
|
14,640 |
14,724 |
10,227 |
3,829 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
7,297 |
4,787 |
5,600 |
3,598 |
||
Cash |
7,343 |
4,089 |
4,627 |
231 |
||
Other current assets |
0 |
5,848 |
0 |
0 |
||
Current Liabilities |
|
|
(12,669) |
(14,927) |
(12,252) |
(10,036) |
Creditors |
(12,669) |
(13,543) |
(12,019) |
(9,803) |
||
Short-term borrowings |
0 |
0 |
(233) |
(233) |
||
Other current liabilities |
0 |
(1,384) |
0 |
0 |
||
Long-Term Liabilities |
|
|
(5,670) |
(4,593) |
(4,322) |
(5,226) |
Long-term borrowings |
0 |
0 |
(296) |
(1,200) |
||
Other long-term liabilities |
(5,670) |
(4,593) |
(4,026) |
(4,026) |
||
Net Assets |
|
|
33,336 |
22,205 |
20,938 |
14,789 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
2,737 |
(316) |
1,002 |
(1,942) |
Net Interest |
3 |
(22) |
(251) |
30 |
||
Tax |
(428) |
247 |
(73) |
(1,754) |
||
Capex |
(2,167) |
(2,806) |
(3,289) |
(2,635) |
||
Acquisitions/disposals |
(326) |
0 |
2,936 |
1,000 |
||
Financing |
47 |
190 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(134) |
(2,707) |
325 |
(5,300) |
||
Opening net debt/(cash) |
|
|
(6,594) |
(7,343) |
(4,089) |
(4,098) |
Other |
883 |
(547) |
(316) |
0 |
||
Closing net debt/(cash) |
|
|
(7,343) |
(4,089) |
(4,098) |
1,202 |
Source: Brady (historicals), Edison Investment Research (forecasts). Note: IFRS 9 and IFRS 15 have been applied from FY17. FY17 excludes the recycling business. FY19 forecasts have been updated to reflect the reduced revenues, FY20 forecasts have been withdrawn pending further clarification expected with interim results on 23 September 2019.
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Research: TMT
Management has reiterated FY19 guidance, despite revenue growth at the interim stage being a little below its own expectations. H219 should provide better revenue and profit growth as new modules will stimulate growth, and the internal investment reduces. EQS continues to trade at a significant discount to its peers, and the current share price is discounting growth well below management’s expectations.