Bad times make for good buys – or at least that’s the mantra of the contrarian investor.
It seems also to have been the guiding philosophy behind a trade made by the tech-savvy Kestrel Investment Partners as it swooped to pick up a further stake in Brady Plc (LON:BRY).
It did so in the wake of a profit warning that has so far wiped around 44% off the value of the business, which provides software to the energy, commodity and recycling sectors.
In taking its holding up a further 4% to 18% it appears to have spotted something missed by investors during the unseemly rush for the exit. But what?
The punishment meted out by the market (perhaps also the market makers) has been brutal, wiping £26mln from the value.
Seasoned market watchers reckon this may have some sort of payback for putting out the news after the market close last Monday evening.
But, as chief executive Gavin Lavelle revealed in his interview with Proactive’s Sarah Lowther, the company had no option but to issue the news when it did.
The guts of the trading update paint a tale of woe: one of deferred contracts against the backdrop of a struggling commodities industry.
But the statement didn't really provide the finer detail, or context. For instance why did it only become apparent Brady would undershoot forecasts a month before the year-end?
That point, according to CEO Lavelle, is a function of the company’s skewed sales cycle.
“Software is procured, typically, at the end of the half year and, more importantly, at the end of the year,” he explained.
“Companies tend to hold back their IT spend to the end of the year.
“If they have had a good year then they will spend the money. If they haven’t, then they cool off.”
So the first six months of 2015 were fairly good. Brady signed a deal with the world’s largest recycling firm and a top-four commodities company.
However, the summer saw the meltdown in China that wiped 20% off the stock market.
More importantly, from the company’s standpoint, Brady customers in the commodities sector were rattled as iron ore, copper and scrap metal were dumped on the market.
Squeezed and shaken, they turned off the cash taps. Brady didn't really start to learn of the wholesale delays to software contracts until last month.
“The deals haven’t gone away,” Lavelle said. “They have just been pushed into 2016."
Even so, Brady is expected to be loss-making this year. But it is enacting a round of cost cutting that will hopefully save £1.7mln a year.
“That means we are being prudent coming into 2016,” Lavelle said.
“We have signed a number of contracts in the second half of the year, including five Cloud-based transactions.
“These are really good deals for us and we will start to see that recurring revenue in our model.”
Around 55% of its revenue base is recurring with another 25% coming from implementing software, which also provides “good visibility on the first part of 2016,” the Brady boss added.
A cash generative business, it has around £4mln in the bank.
While no formal decision has been made by the board on the dividend, analysts reckon it can afford to pay out around 2p a share this year.
That equates to a dividend yield of 4.4% - which is better than keeping your cash in the building society.
It is hard to say without speaking directly to Kestrel just what prompted it to increase its holding.
But you suspect the outlook for the business is not quite as bad as the share price suggests. And in fact Brady could well be prove an interesting recovery play.