Strong earnings growth
Brady (LONDON:BRDY) reported record FY14 profitability, with adjusted EBITDA up 79%, as revenue grew 13% at constant currencies. Cash generation was strong (the £9.6m cash pile equates to 12p per share) and the dividend was lifted by a higher-than-expected 9%. The strong numbers demonstrate the resilience of the business to volatile commodities. While falling commodities prices hurt producers, they are beneficial to traders and manufacturers who also purchase the group’s software. Activity remains busy with the group close to signing another substantial deal, and hence we believe the stock continues to look attractive at c 16x our FY16e earnings.
Investment case: Commodities software growth play
Brady is the largest Europe-based E/CTRM company and the fourth largest globally (c 3% market share), and is increasingly winning business around the world – 32% of FY14 revenues were outside its traditional EMEA base. The plan is to expand the global customer base and benefit from cross-selling opportunities in a $1.7bn global market growing at 5% pa (ComTech Advisory). The sector benefits from a range of growth drivers, including customers underinvested in IT and regulation, compliance and risk-related factors. While the commodities market has trailed other sectors in the shift to the cloud, this trend is gaining significant traction, with 30% of customers taking the cloud option in FY14. Visibility is improving with 51% of FY14 revenues recurring and there is visibility of c 65%+ of FY15 sales.
Final results: Broadly in line with January update
Revenue rose 13% to £31.0m – below our forecasts, due to the weak Norwegian krone – while EPS was slightly ahead of our forecast at 5.3p. Operating cash flow was healthy at £6.2m and the group’s cash pile swelled by £2.4m to £9.6m.
Forecasts: FY15 EPS maintained, FY16 introduced
We forecast revenues to grow by 7% in both FY15 and FY16 to £33.3m and £35.6m respectively. Our FY15 adjusted EBITDA eases to £6.2m (previously £6.4m) while EPS are maintained at 5.8p on a lower tax assumption.
Valuation: Growth supported by strong balance sheet
Net of the £9.6m cash, the shares trade on c 14.2x our FY16 EPS, 2.0x EV/sales and 10x EV/EBITDA. Despite the recent rally, the valuation continues to look attractive relative to the peer group and we note that all the other major E/CTRM players have changed hands in recent years, eg Triple Point was sold in 2013 for 5x sales.
To Read the Entire Report Please Click on the pdf File Below