Record licence backlog underpins FY14
While FY13 numbers were broadly in line, three substantial contracts won in Q4 help to underpin FY14 and beyond and considerably boost Brady's (BRDY.LSE) standing as a commodities software vendor. The group has been broadening its geographical spread, focusing its sales effort on winning larger contracts and continues to expand its recurring revenue book (hosted cloud is the default for new sales). The business remains in strong financial health, generates respectable cash flows and has its largest ever pipeline. Hence, in our view, the shares look good value on c 12x our cashadjusted FY15 EPS if the group can maintain the deal-signing momentum.
Investment case: Commodities software growth play
Brady is the largest Europe-based ECTRM company and the fourth largest globally (c 5% market share), and is increasingly winning business around the world. The plan is to expand Brady’s global customer base and benefit from cross-selling opportunities in a $1.6bn global market (ComTech Advisory). The sector benefits from a range of growth drivers, including customers underinvested in IT, and regulation, compliance and risk-related factors. The group is transitioning to a rental revenue model and in FY13, 57% of revenues were recurring (52% in FY12).
Final results: FY13 numbers were broadly in line
FY13 revenue rose 4% to £29.4m (we forecasted £29.3m) while normalised PBT halved to £2.5m (£2.6m). The group ended the year with £7.2m (£6.7m) of cash and no bank debt. In H2, management removed £2.2m of costs from the business, including £1.5m from Brady Energy, which underpins an FY14 earnings recovery.
Forecasts: FY14 maintained, FY15 introduced
We are maintaining our FY14 forecasts of £32.7m revenues and £5.0m PBT, though year-end cash rises to £7.6m (£7.1m) mainly due to the stronger than expected December 2013 balance sheet. The FY14 profit recovery is underpinned by the high-margin traditional licence revenues and the H213 cost reductions. We forecast revenues to grow 6% in FY15 to £34.7m with PBT rising 15% to £5.7m.
Valuation: Growth supported by strong balance sheet
Adjusted for the £7.2m of cash and c £0.5m of outstanding acquisition liabilities, the shares trade on 13.3x our FY15 EPS, 1.6x EV/sales and 8.8x EV/EBITDA. The valuation looks attractive, noting that all the other major ECTRM players have changed hands in recent years, eg Triple Point was sold in 2013 for 5x sales.
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