Commodities and technology have both been long-term darlings of the Alternative Investment Market and for Gavin Lavelle, the ability to blend the two has kept his company firmly on the radar of investors. For the chief executive of Brady [Lon: (BRY)][ed. note: parent company of wholly-owned American Brady USA (NYSE:BRC)], a company that develops and sells trading and risk management software to the global commodity markets, economic turbulence has wreaked havoc for his customers in recent years but sales at the company have continued to grow.
When Lavelle was appointed to head up Brady in September 2007 – succeeding its founder Dr. Robert Brady – he was tasked with driving sales, brand and international exposure. Revenues that year touched £5.7m. Three years later they have nearly doubled to £11.1m, with underlying pre-tax profits coming in at £1.5m. The figures contrast with a backdrop of commodity markets that have boomed, corrected and boomed again since 2000. Meanwhile, Brady’s brand recognition has steadily advanced among a blue chip client base that boasts some of the biggest market players in the world.
At its heart, Brady’s software helps anyone involved in energy, metals and soft commodities, from producers to banks to brokers, manage their transactions. With more than 150 clients, the latest being a major upgrade contract from aluminium giant Norsk Hydro (NHY), Brady is a rising star in the market for commodity trading and risk management software. In three years it has pulled of three acquisitions including metals trading specialist Comsoft in January 2009, Swiss soft commodities business Viveo Switzerland in March 2010 and Norwegian energy trading software company Viz Risk Management Services last December. Lavelle says that while the company is now comfortable with its base of intellectual property, further acquisitions are likely.
Gavin, what was your remit when you joined Brady back in 2007?
Well I think that Brady has always had good technology, it was founded on the Cambridge Science Park by some very good engineers. I think it was typical of a software company in that it got to a certain level of development where it needed to do two things. One was to be more commercial and get much more brand awareness and sales power, and second, it needed to drive international expansion. I joined from SunGard, where I spent many years working in the international markets. Robert Brady had done a great job getting the business to a certain level but it was clear that we needed to drive more sales, more brand awareness and further international expansion, in fact diversify our portfolio and the assets that we were trading.
What are the dynamics of your sector and what factors have been an influence in the company’s ability to grow?
Well the big surprise, and in fact one of my reasons for joining Brady, is that when you look at the commodity markets you realise how important they are. People, first of all, need to eat, they need power and they need metal to make things with, so these are absolutely fundamental asset classes for people. Then you look at it another way and ask: ‘Is there any single software company that is dominating that space?’, and the answer is that there isn’t. In many other areas you get giants like Misys (OTC:MUSJF) , SunGard and Thompson Reuters (NYSE:TRI), but in the commodity space there is no 800 lb gorilla dominating the market. As a consequence we have been out to drive organic growth in our business but we’ve also been driving inorganic growth by acquiring companies with good functionality and good domain knowledge.
I think the commodity markets are more challenging than some of the other trading markets principally because the physical delivery is complicated. If you and I are going to trade stocks, you put it in your system and you clear it through the various European exchanges, the delivery is relatively straightforward. If you and I are going to trade five tons of raw material copper, that’s heavy and you have got to put it on a lorry and then onto a ship and then from the ship back on to a lorry again, so the logistics and the physical delivery are much more complicated. Also within the commodities space, the means of delivery between metal and food and power are very different so it is not obvious that one size fits all. We recognise that there are lots of good companies with good IP who can enjoy the benefits of being part of a bigger company with a strong balance sheet and very good institutional support, and that is the plan that we have been working on.
What is the make-up of your client base and where do your revenues come from?
We deal with 150 of the top commodity and energy companies around the world. Including Viz, which we acquired at end of last year, on a split, 45% of our revenue is in metal, 33% is in energy and 22% is in soft commodities. Of the clients that we service, 37% of them are trading companies, 31% are producers, 13% banks, 12% brokers and 7% industrial companies. So that gives you a kind of spread of our business activity.
What is your revenue model and do you have a strategy to evolve your service offering over time?
Historically, Brady has had a traditional licence model. The business that we acquired, Viz, is a rental model and so we are mixed at the moment. We are reviewing that and will decide how we are going to go forward. Basically we make our money by selling licences, services to implement the software including configuration, or in some cases extensions to the product, and then maintenance for ongoing upgrades.
We have got a very blue chip client base and so going forward, when you are dealing with the big guys in the market place and they say good things about you, that helps second and third tier companies – it makes their buying decision easier. So we have a great client base and those clients spend a lot of money in technology overall so as we acquire more IP, we can take a larger share of their overall IT spend.
How have the movements in the commodity markets impacted on Brady?
Well I think the rally in the commodity markets has been very well articulated in the press since 2000. There was a massive bull run, a huge correction in 2008/2009 and then a massive rebound so that things like cotton and gold and the wheats are at all time highs. So there have been really big swings in the market place.
Overall that means different things for different people. When underlying prices are high that is good for the producers but less good for the industrial companies. When the volumes are high, which they had been in 2008/2009, that is great for the brokers and so it means different things to different people. Overall I think commodities had been under the radar of a lot of the investment community. I think the stellar returns that we have seen have meant that more people, whether they are trading companies, banks, brokers or industrial companies, are getting into the commodity space and I think it’s seen as a good, strong, macro trend.
When you have volatility in the market it is good for the traders but when you get the extreme volatility that we saw in ’08 and ’09, that does make life difficult because people are concerned about unexpected events in their business. So what we are very clearly seeing is that, coming out of the credit crunch and the rebound in commodities, there is a lot more confidence about the commodity markets. We saw that in the latter half of 2010 and we are seeing that continue in 2011. So I think that the credit crunch is receding. The overall fundamentals of the commodity market seem to be good and we are seeing more interest across the board. But I think that the most powerful driver we are going to see in the market place is that as a result of the credit crunch there will be absolutely more regulation and compliance. There will be more drive towards central clearing of OTC (over the counter) contracts on exchanges and those laws are being framed now. I think these will be the real consequence of the credit crunch, there is going to be tighter compliance and regulation.
Do you see that change in the market as something that you could benefit from?
It is very clear that a lot of people in the market place have been reviewing their risk policies. Once they review them, they recognise that in certain areas they may need tightening up so then they go and talk to the system integrators to ask who is out there, who is providing technology, and then they start to engage with the technology suppliers. This is a very natural cycle, it takes time to go through that process, but we are certainly seeing a pick up in overall activities. People have decided what they want to do and they are going to go and look at who the suppliers are. We have been doing a global risk management deal for Xstrata (OTC:XSRAF), for their raw materials globally, and that tells you that we can provide risk management to some of the biggest commodity companies on the planet and we have got sophisticated systems that allows them to monitor and manage their risk.
Brady has acquired companies in recent years. How has that shaped the group?
Brady started in the metals business and with the acquisition of our Swiss business, we’re now in soft commodities and Viz, at the end of the year, gave us energy. So I think metals plus softs plus energy is the classical natural resource business, if you like, but I think we are well covered now in terms of IP.
At Brady in 2011, the analysts forecast us to do between £18m and £19m, which means that we are growing but that is still small in relation to the global market. We are starting to increase our brand recognition, Commodity Point recently ranked us third in terms of brand recognition in commodity trading and risk management, and as we get bigger then we start to find business in more and more diversified areas. As I say, at the end of the day everybody needs to eat, have energy and to use metal in some shape or form.
You had very little problem raising money through the market in December to cover the Viz acquisition. Are you broadly satisfied with the way that AIM has performed for you?
Absolutely, I think that AIM is a really good place to be. Firstly, the AIM market really understands natural resources – I think a third of AIM money is invested in natural resource companies. So when I go and talk to investors they really understand natural resources. But Brady I think is fairly unique because we are a technology company supplying natural resources and I think that has a lot of interest. Two hot drivers are technology and natural resources and I think we tick both of those boxes. Furthermore, when we need to go and raise finance AIM is a superb facility for us to go and talk to some of the biggest institutions on the planet. For a company of our size, our investors are really top class and that means we have got good support going forwards. We are well capitalised, we have got around £10m cash on the balance sheet, no debt and we are in a growing market. That positions us very well for organic growth in our core businesses but also to acquire additional pieces to get scale, maybe diversify our IP or extend our geographic reach. So I really feel we are very well positioned.
From an investment perspective could you summarise why Brady is worth a closer look?
Firstly, we are in the natural resources markets, which are growing rapidly. Secondly, there is no single 800 lb gorilla dominating this market place. Thirdly, we are a technology company, and the technology moving on at a pace. So we combine commodities and technology, we are well placed and I think that we are in a market that is wide open.
Finally, what can we expect to see from you during the course of this year?
First of all we will go ahead and secure new clients, so whenever we sign new business we will be announcing those deals. Q1 is typically quiet on software procurement; people tend to buy at the end of full year or end of half year, so we are off to a good start for 2011. We will also have product announcements on what we are doing to help our clients in today’s environment. We have said that we will look to do a deal a year although we are only going to do an M&A deal for the right reasons; it has got to be complementary. Over the last three years we have done three deals. Our new deal only closed on 23 December but it is bedding in very well and we are delighted with it so I think that we will have bandwidth later on in the year to look for additional transactions.
Thank you for your time.