Begbies Traynor: is this the perfect counter-cyclical play?

The current crisis is grist to the mill for Begbies Traynor, writes Mark Watson-Mitchell. 

It is not at all surprising to see the names that are falling by the commercial wayside due to Covid-19.

Companies large and small have been suddenly hit by the impact of this deadly virus. It is painful to watch the demise of so many enterprises because of the, totally understandable, Government-imposed restrictions.

Before the lockdown took grip, it was apparent that the number of UK companies in significant distress in the first Quarter of 2020 was already heading towards the half million mark.

The latest Red Flag Alert Report, for Q1 2020, from Begbies Traynor (LON:BEG), announced last Friday, shows the total was actually 509,000. That is the first time that its research has shown over the half million level.

Of that figure some 99% are companies that employ under 250 people.

And just think how that figure will swell by the end of Q2 – it’s really quite scary.

Just how much, when and whether the Coronavirus Business Interruption Loan Scheme can help to save so many others on the brink will be eventually revealed over the next few weeks.

The Begbies Traynor Group is one of the UK’s leading business recovery, financial advisory and property services consultancy companies. The current crisis is grist to its mill.

It has a nationwide coverage and employs some 735 staff and partners. Its professional staff includes accountants, lawyers, insolvency practitioners and chartered surveyors.

Its business recovery side covers corporate and personal insolvency, while also offering corporate finance on private company transactions. Principally serving the mid-market and smaller companies, it handles the largest number of corporate appointments in the UK.

In financial advisory the group offers forensic accounting and investigations, debt advisory, business and financial restructuring, due diligence and transactional support.

The group’s property services cover valuations of property, businesses, machinery and business assets.

It provides property consultancy, management and planning. The company also handles transactional services covering the sale of property, machinery and other business assets.

As far as the group is concerned it has acted quickly in response to the lockdown. On 24 March it announced that had already enabled the majority of its employees to work remotely and securely, whilst continuing to provide advice and support to its clients.

It is in a strong financial position with plenty of banking facilities previously committed.

At the time of its late March statement the group appeared confident of achieving the market’s targets for its full year to end-April 2020.

Just how it will do in the coming year is obviously an unknown factor, but with such commercial detritus out there, it is a certainty that the group will see increased business.

As with the market gambling service companies, I would suggest that Begbies Traynor is an excellent counter-cyclical winner in the making. 2020 and 2021 could well be ‘boomtime’ for the company.

The company announces its end-of-year trading update in just over a fortnight.

Market forecasts for the year suggest that revenues could hit £69m, while pre-tax profits could come in at around £9m, worth 6p in earnings and covering a 2.8p dividend per share.

Pre-lockdown forecasts for revenues for the coming year were £73.7m and £75.5m in its 2021 year, with forecast profits of £10m next year and £11m for 2021.

I feel that with continuing favourable UK insolvency market conditions this group will do a lot better than those estimates.

Unless something precipitous occurs, I foresee the shares, now 91p, easily outperforming.

Profile 26.11.19 @ 85p set an end-2020 Target Price of 110p.