Brady fightback stalls

An after-hours profits warning on 30 November hammered Brady shares and, despite a partial recovery, these full-year results reflect a company doing what it can until the good times return. The commodity trading and risk management software firm will have a better idea in a couple of months' time.

We already knew the numbers would not be pretty. It's never easy supplying software to the metals, recycling, energy and soft commodities industry when demand from the biggest driver of growth - China - is slowing down. Commodity prices fell another 30% in 2015.

The deferral of "several" contract decisions cost Brady £2.3 million of licence sales last year, and group revenue fell 12% to £27.4 million. Strip out foreign exchange moves and the drop was a more modest 8%. Encouragingly, recurring revenue increased by 5% to 56%.

Still, the impact on the bottom line was severe, turning last year's underlying pre-tax profit of £3.2 million to a £0.9 million loss this time. On a reported basis, a £1.1 million profit became a £1.4 million deficit. Net cash was down, but still £6.6 million at year-end, worth 8p a share.

There's no dividend this time, and cost savings of £2 million were a little better than the £1.7 million flagged three months ago. Unless things get worse, that should be it. But there could be savings from an offshore development business acquired in January. Plans are still being put together, but we know that every 10% of dev work shifted to Bangalore saves Brady £500,000.

This is all encouraging, but when will the deferred business return? Chief executive Gavin Lavelle told Interactive Investor that customers will likely remain cautious, and want to make sure their balance sheets are in good shape. Lavelle has modest expectations for 2016, so one or two big deals could move the needle.

Given the industry buying cycle, a good first half is a must if potential customers are to get IT budgets approved. "We've done a lot of beauty contests," said Lavelle. "Now we have to wait and see if budgets get approval. We'll know more in May/June time."

Brady shares responded badly to the 2015 numbers. They're down as much as 12% to 50p and levels last seen during the recovery late December. But the house broker sees value.

Cenkos Securities has nudged up forecasts for 2016 adjusted earnings per share to 3.2p, putting Brady on 15.6 times earnings. Strip out 8.4p of forecast year-end next cash, and that drops to 13 times.

"Last year's sell-off in the shares has the group trading on an [enterprise value]/recurring revenue multiple of 2.6x," says Cenkos analyst Simon Strong. "This is a valuation level seen in software only at times of deep recession and contrasts with a through-the-cycle average sector rating of 5-6x. We are buyers on this basis."

There's no doubt Brady is a decent company and well-run, and there are lots of reasons why it will do well, according to Lavell: "We don't have a leveraged balance sheet, there's no debt, we generate cash and are a good way to play a turn in the commodity cycle."

He has a valid point, but the shares are not obviously cheap, and investors are clearly unwilling to put any fresh cash on the table until they see evidence that deferred contracts are being resurrected. We'll know more in a few months' time.

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.