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Brady — Transitioning continues

Brady — Transitioning continues

We have revised our forecasts following the newsflow over the last few months. While management has completed its strategic review, the transitioning process is continuing. The group has switched from operating on a divisional basis to global functions. The development team has been unified, and development work has shifted from platforms to ‘microservices’, so that new products can be leveraged across the group. Further, Brady is evolving to a recurring revenue model. We have cut our FY17 forecasts to reflect the current transitioning but forecast revenue and margins to improve significantly thereafter. Given the long-term growth opportunities, notably in agriculture, natural gas and power, we believe the shares look attractive on 14x our cash-adjusted FY19 EPS.

Analyst avatar placeholder

Written by

Brady

Transitioning continues

Revising forecasts

Software & comp services

7 August 2017

Price

69.5p

Market cap

£58m

Net cash (£m) at 31 December 2016

7.3

Shares in issue

83.4m

Free float

87%

Code

BRY

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.1)

(5.4)

1.5

Rel (local)

(6.3)

(8.4)

(9.8)

52-week high/low

81.5p

66.5p

Business description

Brady is the largest Europe-based E/CTRM (Energy, Commodity Trading and Risk Management) 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

July 2017

Interim results

September 2017

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

We have revised our forecasts following the newsflow over the last few months. While management has completed its strategic review, the transitioning process is continuing. The group has switched from operating on a divisional basis to global functions. The development team has been unified, and development work has shifted from platforms to ‘microservices’, so that new products can be leveraged across the group. Further, Brady is evolving to a recurring revenue model. We have cut our FY17 forecasts to reflect the current transitioning but forecast revenue and margins to improve significantly thereafter. Given the long-term growth opportunities, notably in agriculture, natural gas and power, we believe the shares look attractive on 14x our cash-adjusted FY19 EPS.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

27.4

1.0

1.0

0.0

73.2

0.0

12/16

30.3

2.3

2.4

0.0

30.0

0.0

12/17e

29.0

(0.7)

(0.6)

0.0

N/A

0.0

12/18e

30.8

2.9

2.8

0.5

24.7

0.7

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

Investment case: E/CTRM is highly attractive space

While commodity markets remain challenging, the E/CTRM market remains a highly attractive software vertical and Brady, as the largest Europe-based E/CTRM player, is well positioned to benefit. Brady’s solutions support a broad range of services to a wide range of commodity businesses including trading companies, financial institutions, producers, manufacturers and recyclers. Brady has more than 400 customers including many blue chip names. The global E/CTRM market is worth c $1.65bn, and is forecast to grow at c 6% CAGR to 2020 (Comtech). Brady’s traditional strengths are in the metals and electricity verticals, and Brady seeks to leverage these strengths into agriculture and European power, respectively. Recurring revenues represented 62% of the total in FY16, which we forecast to remain at similar levels in FY17, but grow to 66% in FY18 and to 69% in FY19.

Forecasts: FY17 cut, FY18 and FY19 introduced

We have cut our FY17 revenue forecasts by 10%, while adjusted operating profit falls by £4.7m to a £0.7m loss. Noting the lack of contract wins, we expect FY17 to be more H2 weighted than normal. We forecast revenues to rise by 6% in FY18 and by 10% in FY19, as the benefits from the group reorganisation feed through, with operating margins lifting to 9.5% in FY18 and 14% in FY19. We forecast Brady’s net cash position to slip to £5.7m as at end-FY17, rising to £8.0m a year later.

Valuation: Well positioned for commodities recovery

Brady trades on 24.7x our FY18e EPS falling to 15.6x in FY19e. Alternatively, it trades on 1.5x FY19e EV/sales and 9.4x EV/EBITDA. In our view, the group’s strong balance sheet (FY16 £7.3m cash and no debt) and streamlined cost base position Brady well for a broader recovery in the commodity markets.

Strategic review completed, restructuring continues

After Ian Jenks was appointed chairman in June 2016, he initiated a strategic review of the company and appointed external consultants to look at all aspects of the business. As a result of the review, Brady has switched from operating on a divisional basis to global functions, and this has involved a lot of management focus over recent months. The group will no longer report on a divisional basis. Two small offices in North America have been closed. The sales team has been trained to sell all the group’s products globally, while the development team has been unified, with all global staff reporting to the group’s chief technology officer (CTO). Brady outsources some coding to a company in Poland and it intends to make greater use of its Bangalore development centre, which was acquired with energycredit. New product development has shifted from platforms to web enabled components based on microservices (service-oriented architecture) so that any new products can be leveraged across the group. This is part of a long-term strategy to evolve the group’s existing ten platforms to a single platform, utilising the functional components. The new platform is based on the Brady Web Framework which ensures consistent data service layers and enables close integration with third-party solutions. This enables the group to sell its products to customers that operate large in house systems or competing E/CTRM systems.

2016 senior management changes

Paul Fullagar stepped down as chairman over the 2016 summer after nine years and Ian Jenks was appointed to the role. In early September, it was announced that Gavin Lavelle had stepped down as CEO after nine years and Mr Jenks took on the interim position of executive chairman. In early October, Elizabeth Sipiere joined Brady as a non-executive director. In addition, Ms Sipiere took on the role of chief operating officer.

Forecast changes

We have cut our FY17 revenue forecasts by 10% to reflect the current transitioning of the business, while adjusted operating profit falls by £4.7m to a £0.7m loss. This reflects the declining focus on upfront licence revenue, a lower level of revenue overall, along with a small amount of restructuring costs. Nevertheless, the business remains underpinned by a high level of recurring (c £18m) and contracted (c £24m) revenues. We forecast revenues to rise by 6% in FY18 and by 10% in FY19, as the benefits from the group reorganisation feed through, with operating margins lifting to 9.5% in FY18 and 14% in FY19. We forecast the group’s net cash position to slip to £5.7m as at the end-FY17 and recover to £8.0m a year later.

Exhibit 1: Forecast changes

Old

Actual

Change

Old

New

Change

New

New

Revenue (£'000s)

2016e

2016

(%)

2017e

2017e

(%)

2018e

2019e

Licence revenues

5,182

3,600

(31)

5,390

2,400

(55)

1,898

1,760

Recurring fees (software rental, hosting and support)

17,226

18,900

10

18,418

18,200

(1)

20,356

23,382

Services and development

8,119

7,800

(4)

8,363

8,400

0

8,568

8,739

Group revenue

30,527

30,269

(1)

32,170

29,000

(10)

30,822

33,881

Growth (%)

11.5

10.6

 

5.4

(4.2)

 

6.3

9.9

Cost of sales (before dev cost capn)

(11,298)

(11,823)

5

(11,485)

(11,921)

4

(11,780)

(11,991)

Capitalisation of dev'ment costs (net)

341

(43)

(113)

(62)

(260)

320

(87)

132

Gross profit

19,570

18,403

(6)

20,624

16,819

(18)

18,955

22,022

Gross margin (%)

64.1

60.8

 

64.1

58.0

 

61.5

65.0

Selling & administrative expenses

(16,136)

(16,062)

(0)

(16,620)

(17,490)

5

(16,035)

(17,282)

Adjusted operating profit

3,434

2,341

(32)

4,003

(671)

(117)

2,920

4,741

Operating profit margin (%)

11.2

7.7

 

12.4

(2.3)

 

9.5

14.0

Growth (%)

271.6

153.4

 

16.6

(128.6)

 

(535.5)

62.3

Net interest

50

3

 

60

20

 

30

60

Profit before tax (norm)

3,484

2,344

(33)

4,063

(651)

(116)

2,950

4,801

Amortisation of acquired intangibles

(1,640)

(1,718)

 

(1,640)

(1,750)

 

(1,750)

(1,750)

Share-based payments

(263)

(90)

 

(275)

(100)

 

(300)

(300)

Exceptional items

(251)

(2,037)

 

0

0

 

0

0

Profit before tax

1,331

(1,501)

(213)

2,148

(2,501)

(216)

900

2,751

Normal tax charge

(610)

(352)

 

(813)

117

 

(590)

(1,056)

Profit after tax

721

(1,853)

(357)

1,336

(2,383)

(278)

310

1,694

Adjusted EPS (p)

3.5

2.4

(31)

3.9

(0.6)

(116)

2.8

4.4

P/E – adjusted EPS (x)

 

29.0

 

N/A

24.7

15.6

Source: Brady, Edison Investment Research

Exhibit 2: Cash flow and reconciliation of EBITDA definitions

(£’000)

FY14

FY15

FY16

FY17e

FY18e

FY19e

Adjusted operating profit

5,019

924

2,341

(671)

2,920

4,741

Depreciation (incl s/w)

573

582

678

700

700

700

Adjusted EBITDA

5,592

1,506

3,019

29

3,620

5,441

Working capital

(695)

139

(721)

(870)

(154)

(169)

Amortisation of devt costs

928

1,187

1,598

1,843

1,770

1,718

Exceptional costs/misc

384

(469)

(1,159)

0

0

0

Operating cash flow

6,209

2,363

2,737

1,002

5,236

6,989

Net interest

58

31

3

20

30

60

Tax paid

(420)

(416)

(428)

(400)

(531)

(960)

Purchase fixed assets (incl s/w)

(618)

(624)

(612)

(638)

(678)

(745)

Capitalised development

(1,801)

(1,967)

(1,555)

(1,583)

(1,683)

(1,850)

Free cash flow

3,428

(613)

145

(1,599)

2,374

3,494

EBITDA (Edison definition)

5,592

1,506

3,019

29

3,620

5,441

Deduct: share based payments

(232)

(243)

(90)

(100)

(300)

(300)

Add back: amortisation cap devt

928

1,187

1,598

1,843

1,770

1,718

EBITDA (Brady definition)

6,288

2,450

4,527

1,772

5,090

6,858

Source: Brady, Edison Investment Research

Exhibit 3: Financial summary

£'000s

2014

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

31,015

27,374

30,269

29,000

30,822

33,881

Cost of Sales

(10,977)

(10,867)

(11,866)

(12,181)

(11,867)

(11,859)

Gross Profit

20,038

16,507

18,403

16,819

18,955

22,022

EBITDA

 

 

5,592

1,506

3,019

29

3,620

5,441

Adjusted Operating Profit

 

 

5,019

924

2,341

(671)

2,920

4,741

Amortisation of acquired intangibles

(1,613)

(1,640)

(1,718)

(1,750)

(1,750)

(1,750)

Exceptionals items

(2,143)

(469)

(1,159)

0

0

0

Share based payments

(232)

(243)

(90)

(100)

(300)

(300)

Operating Profit

1,031

(1,428)

(626)

(2,521)

870

2,691

Net Interest

58

31

3

20

30

60

Profit Before Tax (norm)

 

 

5,077

955

2,344

(651)

2,950

4,801

Profit Before Tax (FRS 3)

 

 

1,089

(1,397)

(623)

(2,501)

900

2,751

Tax

(630)

(329)

(1,230)

117

(590)

(1,056)

Profit After Tax (norm)

4,315

813

1,992

(533)

2,360

3,744

Profit After Tax (FRS 3)

459

(1,726)

(1,853)

(2,383)

310

1,694

Average Number of Shares Outstanding (m)

81.3

82.7

83.0

83.3

83.8

84.2

EPS – normalised (p)

 

 

5.3

1.0

2.4

(0.6)

2.8

4.4

EPS – FRS 3 (p)

 

 

0.6

(2.1)

(2.2)

(2.9)

0.4

2.0

Dividend per share (p)

1.85

0.00

0.00

0.00

0.50

1.00

Gross Margin (%)

64.6

60.3

60.8

58.0

61.5

65.0

EBITDA Margin (%)

18.0

5.5

10.0

0.1

11.7

16.1

Adjusted Operating Margin (%)

16.2

3.4

7.7

-2.3

9.5

14.0

BALANCE SHEET

Fixed Assets

 

 

32,614

31,461

37,035

34,963

33,104

31,532

Intangible Assets

30,996

29,831

35,999

33,989

32,152

30,534

Tangible Assets

1,076

1,147

978

916

894

939

Deferred tax

542

483

58

58

58

58

Current Assets

 

 

16,948

13,633

14,640

12,670

15,418

19,143

Stocks

0

0

0

0

0

0

Debtors

7,368

7,039

7,297

6,991

7,430

8,168

Cash

9,580

6,594

7,343

5,679

7,987

10,975

Current Liabilities

 

 

(10,545)

(10,804)

(12,669)

(11,352)

(11,676)

(12,347)

Creditors

(10,545)

(10,804)

(12,669)

(11,352)

(11,676)

(12,347)

Short-term borrowings

0

0

0

0

0

0

Long-Term Liabilities

 

 

(4,651)

(4,814)

(5,670)

(5,670)

(5,670)

(5,670)

Long-term borrowings

0

0

0

0

0

0

Other long-term liabilities

(4,651)

(4,814)

(5,670)

(5,670)

(5,670)

(5,670)

Net Assets

 

 

34,366

29,476

33,336

30,611

31,176

32,657

CASH FLOW

Operating Cash Flow

 

 

6,209

2,363

2,737

1,003

5,236

6,989

Net Interest

58

31

3

20

30

60

Tax

(420)

(416)

(428)

(400)

(531)

(960)

Capex

(2,419)

(2,591)

(2,167)

(2,221)

(2,361)

(2,595)

Acquisitions/disposals

0

(1,186)

(326)

(66)

(66)

(66)

Financing

338

469

47

0

0

0

Dividends

(1,378)

(1,524)

0

0

0

(440)

Net Cash Flow

2,388

(2,854)

(134)

(1,664)

2,308

2,988

Opening net debt/(cash)

 

 

(7,222)

(9,580)

(6,594)

(7,343)

(5,679)

(7,987)

Other

(30)

(132)

883

0

0

0

Closing net debt/(cash)

 

 

(9,580)

(6,594)

(7,343)

(5,679)

(7,987)

(10,975)

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

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Brady and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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United Kingdom

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10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Brady and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: TMT

YouGov — Moving up margins

YouGov’s FY17 year-end trading update confirms that positive trading momentum continued in the second half for Data Products and Services. Results should be ahead of our previous forecasts and well ahead of market growth. The results reflect the growth in high-margin products as well as margin improvements in custom research in addition to some currency benefit. We have moved our PBT numbers up by 5% for FY17e and 9% for FY18e. The shares continue to trade at a premium to the global sector, although that is being eroded by YouGov’s faster growth.

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