Shares in niche commodity trading software provider Brady (LON:BRY) today fell 40% in early trade as the company warned on profits, with revenue from new customers set to be delayed until the second half. The share price fall was large:
Brady has been listed a long time and this latest warning seems par for the course. Over the past decade the share price has risen and fallen, topping 100p at times and dropping to as low as 50p. Today’s price sees a new decade low for the company, with only the prices of below 30p in 2006 being any lower.
Most people will be quite unaware of the products Brady provide (as I am myself). They provide software solutions for trading of commodities, and promise solutions over the complete life-cycle, from initial purchase to settlement as well as client services such as credit risk and cloud storage.
Given that commodities have been traded as long as humans have been around, this may considered to be a safe market to be in, but it is plain from the revenue data that Brady aren’t the only company offering these solutions.
The warning comes in a Trading Notice and Notice of Results RNS. We start off OK:
Brady plc (BRY.L), a leading global provider of trading, risk management and settlement solutions to the energy and commodities sectors, announces that, over the course of the first half of 2019, Brady has had positive engagements with existing customers, and the recurring revenue is in line with expectations.
Here comes the kicker:
However, the pipeline of revenue from new customers forecasted will not materialise during fiscal 2019, although new business bookings are anticipated in the second half. As such, the Board has concluded that full year revenue will be circa £19m, and this will have a consequent impact on EBITDA performance.
It was only a few months ago when the last trading statement forecast that things were in line with expectations, so this must have gone wrong recently. £19m full-year revenues would also imply a decreased amount of revenue from existing customers as this figure is under the £23.2m seen the year before. We can’t call this ex-growth, it seems that the company is shrinking.
The EBITDA impact is not quantified here, possibly because it may be even more adverse. Nevertheless, investors are not fooled and the company has been marked down a long way.
Even on a cursory glance the business doesn’t look great from an investment point of view. Brady point out the word ‘turnaround’, but this turnaround has been ongoing for the best part of 5 years now. If 2019 posts a loss as seems projected, this will be the fifth year in a row that a loss has been posted.
Of course, profit is a financial construct. EBITDA has been averaging close to zero (a small positive some years, a small negative other years), so allowing for this the effect on cash-flow has been gentler than the statutory results. But a real drain are capex costs, which outstrip operating cashflow as follows:
Looking at the latest report the majority of this capex is ‘investment in intangible assets’, namely the software. It could be said that this accounting treatment is fairly aggressive, which capitalises items that could be termed expenses. This is not necessarily wrong in itself, given that software is the main asset of the company, but is something we should be aware of.
This gives rise to quite a weak balance sheet. With a declining amount of business, total asset value of the company has actually decreased over the years as costs are impaired and amortised. Out of the current £37.5m assets reported in the last annual report, £26.4m was of the intangible variety, which leaves the company on a negative net tangible asset value. It is difficult to value intangibles here, but given that the market appears to suggest there are substitute products, this could be uncertain.
Another aspect is liquidity. The company has survived this lean run of results as it had cash in the bank. 2014 was the last time it saw a profit, and cash in the bank was £9.5m. By cutting out dividends, the rate of cash burn has slowed, but the latest broker notes (available on Research Tree) are slightly worrying. Cash from operations this year is negative, and that is before the necessary capex spend takes place. Net Cash flow is projected at -£5.8m which means the cash balance is wiped out and there is closing debt of £1.2m.
The annual accounts have this to say:
We can see that should things get any worse we could be sailing very close to the wind here. With the company having a record of losses, an equity raise may be a last roll of the dice to see the turnaround through.
Notably the remuneration section shows that neither the CEO or CFO do not own any shares in the company, and there has been no director dealing of shares for over four years. Not the greatest show of confidence.
What is quite surprising is that Brady still has a market cap of almost £30m after todays profit warning. There are plenty of bad points for investors to digest: negative tangible asset values, no director shareholdings, track record of losses, capitalisation of development costs, potential future liquidity issues or dilution of shares. Any one of those might be cause for concern.
The broker update is not particularly positive either, and they have also touched on another point: visibility of revenues are difficult to forecast, and we need to wait until the next update to see how well (or not well) the pipeline of business has performed.
With the forecast for the company to slip into debt, this appears to me to be a binary bet on whether you can trust management to perform. And even then, the odds at current prices are stacked against the investor: the prices are baking in profits of over £1m+, which requires a wild swing from what is happening currently, and even the brokers would push this out to past 2021 now.
So even at the lower prices today I’d still regard this as quite expensive, and there are many decent software companies out there which are just as expensive but have much better prospects. 1/5.