Brady — Building the business for a brighter future

Brady — Building the business for a brighter future

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.

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Written by

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.

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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

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

Research: Investment Companies

The Diverse Income Trust — Unloved small-caps offer long-term opportunities

The Diverse Income Trust (DIVI) aims to generate a good and growing level of income, as well as capital gains over the long term. It is not constrained by benchmarks and has a wide opportunity set across the market capitalisation spectrum to find high-quality, resilient companies that can sustain dividend growth over the long term. The managers, Gervais Williams and Martin Turner, have a small-cap bias and over two-thirds of the portfolio is outside of the FTSE 350 index. Since its inception in April 2011, the trust has delivered an annualised NAV total return of 12% and consistent growth in its regular dividend. Performance in more recent years has lagged the FTSE All-Share index, which the managers believe reflects small-cap and value stocks being overlooked, and they are finding superior investment opportunities in this segment of the UK equity market.

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