A bumper H2, but revenues fall into FY14
Brady had a bumper H213, with c £8m of new business signed in Q413, including three deals that were much larger than typical deals. However, the group recognised almost none of this revenue due to its conservative revenue recognition policy, with most expected to be recognised in FY14. Also, a decline in the Norwegian kroner (NOK) took its toll on the Energy unit’s revenues. Hence, FY13 revenues are £1.8m below our expectations, while net cash is £0.2m ahead. We have cut our FY14 revenues due to the strong pound (GBP) and conservatively eased profits, but cash generation remains solid. In our view, the shares look good value on c 14x our cash-adjusted FY14 EPS if the group can maintain the deal-signing momentum.
Trading update: 13 new significant contracts in FY13
Brady signed 13 new significant licence contracts in FY13, including four hosted cloud deals, and its pipeline remains strong. The Metals, Physicals and Recycling businesses have been performing very well. Recycling has signed seven significant contracts since it was acquired in late 2012, including two after the period end with Allegheny Technologies and MidWest Scrap, while the Physicals unit has grown at 30% pa since it was acquired in 2010. The group has also been winning an increasing amount of business in North America, reflecting that region’s improving economic environment, while Europe has been held back by its more challenging conditions. Other recent contract wins were announced with Brazilian bank BTG and an up-sell with Freepoint, the US-based multi-asset trading company. As we reported in September, the group cut an annualised £2.2m from its cost base in H2.
Forecasts: Easing back revenues and profits
As the GBP has recently appreciated considerably against the NOK, as well as against the dollar and euro, we have conservatively cut our FY14 revenues by £2.3m to £32.7m. Our adjusted operating profit comes back by £1.8m to £5.0m, while net cash at end-FY14 falls by £0.9m to £7.6m. Our new forecasts are underpinned by a record backlog and strong recurring revenues (57% of total).
Valuation: Attractive when adjusted for net cash
Adjusted for the £6.7m of cash and c £1.4m of outstanding acquisition liabilities, the shares trade on 13.8x our FY14 EPS. Private equity continues to have a strong interest in this sector with Triple Point, one of Brady’s largest competitors, sold in July 2013 to ION, backed by TA Associates, for $900m, or 5x FY12 sales (Brady trades on c 1.7x our FY14 EV/sales). Meanwhile, Silver Lake Kraftwerk and Nexus Venture Partners invested $40.75m in India-based EKA Software late last year.
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