Brady Acquisition Boosts Group's Presence In Key Markets

Brady Corp. (BRC) has acquired US-based Systems Alternatives International (SAI) for up to $10m. SAI develops and licenses highly specialised software which scrap metal businesses use to manage their business processes. The deal, which is Brady’s first acquisition outside Europe, effectively adds a new asset class to group’s existing portfolio, brings on board 40 customers and boosts the group’s presence in the key North American markets. In our view, the deal is immediately earnings enhancing and we believe there is excellent potential to create further value through cross-selling SAI’s products to Brady’s existing customers and through margin improvements.


Acquisition of Systems Alternatives International
Brady is acquiring SAI for an initial $6.25m (c £3.9m) in cash. A further $3.7m in a mixture of cash and shares is payable to the vendors, subject to achieving financial targets over the next three years. SAI will remain an independent unit within the Brady group and the vendors – SAI’s four founders – will stay with the enlarged group. SAI designs, develops and delivers software solutions for commercial recyclers, brokers, and mills/consumers primarily in North America. It has also been seeking to grow internationally and c 5% of sales are in Australia. Brady wants to leverage the new product offering through its global sales network and cross-sell it to its existing client base, primarily in Europe, a number of which have a recycling business.

Implications and forecasts: Another value-creating deal
We estimate that SAI is being acquired at 1.3x FY13 revenues, which is well below Brady’s existing rating of 2.2x. The deal gives Brady a much stronger position in the steel market, which is substantially larger than its traditional base metals and precious metals markets. However, the metals recycling market is quite distinct and hence we suggest it should be viewed as a separate asset class. We forecast the enlarged group to generate £29.9m of revenues in FY12 (previously £29.4m), rising to £37.4m in FY13 (£33.3m). Our adjusted EPS rises to 6.0p and 6.5p from 5.9p and 6.2p previously. We are now forecasting year-end net cash (before acquisition liabilities) of £7.2m in December 2012 and £9.6m a year later (previously £11.1m and £13.6m).

Valuation: Sector consolidation keeps the stock in focus
On a cash-adjusted basis, the stock trades on 15.5x our earnings in FY12 and 14.3x in FY13. This looks attractive given the strong industry drivers and potential upgrades to our forecasts from cross-selling the group’s products. Further, the enlarged group trades on c 2.0x FY13 sales, which is well below recent deals in the sector.

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