The last two years have seen a significant streamlining of the cost base and a focus on delivering on several significant legacy contracts, which will be completed in FY19. There has also been significant investment in product in FY18 (R&D was 30% of sales). Carmen Carey took on the CEO role in February and management is now looking to exploit the benefits of the streamlining and investment, with an increasing emphasis on new sales. The market opportunity is substantial and we believe Brady is well positioned to benefit from the significant sector consolidation.
Revenue grew by 4% to £23.2m, held back by a 1% currency headwind. This was respectable given the focus was on account management rather than winning new clients. The gross margin expanded from 56% to 60%, reflecting a higher licence revenue element in the product mix. EBITDA (Brady basis) swung from a £0.3m loss in FY17 to a £2.6m profit. The group ended the year with cash of £4.6m and £0.5m of finance leases, leaving net cash of £4.1m, which is steady with end FY17. This was c £1m lower than expected as two projects took a little longer to complete and £1m for the projects was received in the first week of February. The group spent £7m on R&D in FY18, of which £2.9m was capitalised, reflecting new product launches including a tolling module. The CTRM fast start was launched in FY18 and the first solution has been sold and implemented. Brady is contesting a claim from the Norwegian tax authorities, which goes back to 2013, that its Norwegian IP was transferred to the UK. However, an invoice for £2.6m has been received (of which Brady has already provided £1.6m) and cash payments of £2m are expected to be made in FY19 with another £0.6m in FY20.
We have eased our revenue forecasts by 2% in FY19 and 3% in FY20 and have increased our capitalised development forecasts. We have cut our near-term profit forecasts, but broadly maintained FY20 gross profit and EBITDA. We forecast net cash to slip to £2.7m at end-FY19, after the Norwegian tax payments and after receiving the £1m final payment for its disposed recycling business. We forecast the business to be comfortably cash generative from FY20.
The streamlining and investment pave the way for scaling up the business, with the valuation upside resting on the shift to new technologies such as microservices and the cloud. 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.