Brady begins major repair job

It's been a week since commodity trading and risk management software firm Brady issued a grim profits warning. There's never a good time to tell the market your business is struggling, but picking 5.47pm on a Monday night was a bad idea.

Warnings are typically included among the first wave of releases on the regulatory news service (RNS) at around 7am each morning. Waiting until after the market closes is typically perceived by investors to be an attempt to bury bad news. The criticism levelled at Brady in the aftermath is, therefore, unsurprising.

We've spoken to chief executive Gavin Lavelle before and always been impressed, so were keen to hear his side of the story. Unsurprisingly, it was company's broker which pushed to get the news out when it did. "We believed it was good practice to get it out as soon as possible," Lavelle told us. "There was no intention to bury the news."

Still, Brady shares crashed as much as 56% the next day to a low of 37p. They've limped up to 46p since, but management must now work hard to win back shareholders' trust.

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To make a bad week even worse, a well-known share tipster laid into Brady, writing that the company "could just be bust by June 2016".

Brady currently thinks it will have £4 million of net cash at the December year-end, although Lavelle believes that may be "conservative". The true figure could be more like £5 million.

We'll see. That's still down from £6.2 million at 30 June, but it is at least partially explained by the $1.8 million (£1.2 million) initial payment for the September acquisition of Scraprunner, the firm which manages container pick-up and delivery scheduling.

About £1.7 million of costs are being stripped out of the business, too. As around 70% of Brady's costs are people, big job cuts in the New Year are inevitable. The cost of the savings programme is currently put at £400,000.

Of course, the warning raises questions about whether the dividend - which cost £1.5 million this year - is affordable. Lavelle told us the payout would be reviewed as usual. If it is axed, we won't find out until full-year results in March.

Clearly, shareholders will hope for a slice of good news at a scheduled update in the second or third week of January. But it will probably be too early for any real sign of a turnaround.

Commodities slump hits suppliers

Brady supplies trading and risk management software for metals, recycling, energy and soft commodities. It counts some of the world's largest commodity companies as customers, and this year signed a big deal with the largest recycling company around.

Traders love volatility and can make money whether prices are going up or down. However, the Chinese stockmarket sell-off in August caught them out. Whatever the long-term implications of world population growth and industry capacity cuts, commodity prices are unlikely to recover soon.

In one of the worst years ever for mining shares, working for the likes of Glencore, which is desperately trying to slash costs by over $10 billion, makes suppliers vulnerable. Given companies typically hold back IT spend - software and equipment upgrades - until the fourth quarter, it's only now that the problem is rearing its head.

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And Brady's 30 November update was pretty gloomy:

"Over the last month or so market conditions have materially deteriorated in the commodity sector in which Brady's clients operate.

"Several of the major commodity trading companies have reported deteriorating trading conditions, issued profit warnings alongside announcements of cost cutting or restructuring measures. 

"The net result of this for our business is that customers and new prospects are lengthening buying cycles. Whilst most of the opportunities that were there in September are still good prospects, they will not be converted into sales in this financial year. 

"As a result, revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) for the financial year ended 31 December 2015 will be materially below market expectations."

Watch and see

House broker Cenkos has slashed revenue forecasts for 2015 by 16% to £27.5 million and, because of those high fixed costs, the cash profit estimate comes down from £6.7 million to £2 million and Brady is tipped to swing from a pre-tax profit of £1.1 million in 2014 to a pre-tax loss of £1 million this time.

Investec decided to flog 3.2 million shares a day after the warning, cutting its stake to less than 5%, but fund manager Kestrel Partners, which was still buying shares as recently as October, has just snapped up another 2.5 million shares, lifting its stake to 18%.

Brady is a likeable company, and Kestrel's experts clearly see something in the shares. But, time and again, we see companies that have just warned manage a partial recovery only to suffer a further setback. Rarely do things improve sufficiently quickly to make the rally stick.

This is not the end of Brady, but investors might decide it's better to watch and see what happens in January, and, indeed, at the annual results in March.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.