FY18 numbers were broadly in line with expectations and we have maintained our forecasts. Management remains confident in the outlook as the group stands to benefit from the streamlining and investment of the last few years. In December, Brady Corporation (NYSE:BRC) appointed Carmen Carey, currently a Brady non-executive director, as its new CEO. An initial priority for the new CEO will be developing the new sales strategy. The market opportunity is substantial, and we believe Brady is well positioned to benefit from the significant sector consolidation.
Investment case: E/CTRM is a highly attractive space
Brady has more than 300 customers, including many blue-chip names that cover a wide range of commodity businesses such as trading companies, financial institutions, producers and manufacturers. The global E/CTRM market was worth c $1.65bn in 2016 (ComTech Advisory) and is forecast to grow at c 6% CAGR in 2016–20. Brady has a strong position in niche areas including commodity logistics, credit risk, metals (number one globally) and European energy, yet has a relatively modest market penetration overall (we estimate 1.2%). Recurring revenues were c 70% of the FY18 group total, which is in line with the 70% medium-term target.
Trading update: Broadly in line
FY18 revenues were c £23m (we forecast £23.7m), while adjusted EBITDA (Brady definition) was in line with our forecasts at £2.6m. Year-end cash was slightly below expectations at £4.6m (£5.1m) as two projects were invoiced later than expected in the final days of 2018. Brady says it continued to make significant progress in delivering on its strategy, including several customer-focused projects.
Appointment of new CEO
In December, Brady appointed Carmen Carey as its new CEO, with effect from 18 February. As part of this process, Ian Jenks will step back from his role as executive chairman to non-executive chairman. Ms Carey joined the Brady board as a non-executive director in March 2017. She is an IT industry veteran with a strong sales focus, whose career has encompassed leadership roles as an executive in fast-growing, global, VC-backed and publicly traded technology companies.
Valuation: Well-positioned in a consolidating sector
While we only forecast modest near-term profitability, the long-term shift to microservices and cloud will enable much-improved scalability of the business model. If Brady could take a 5% market share and generate 20% operating margins, it would suggest c 400% upside if the stock traded on c 10x earnings.
