Begbies Traynor – an excellent counter-cyclical play on the UK economy

Begbies Traynor looks like an inexpensive and a wonderful counter-cyclical investment, writes Mark Watson-Mitchell. 

Red Flag Alert has indicated that, by the end of September this year, there were some 489,000 businesses in ‘significant distress’ in the UK. That is an awful number, which has, unfortunately, grown substantially since the 2016 EU referendum.

It appears that the travel, construction, retail and real estate and property sectors have been the worst affected.

And this is what is even more amazing – ‘significant distress’ applies to those businesses with minor County Court Judgments of less than £5,000 filed against them or those that have been identified by the RFA credit risk scoring system.

The 139,000 rise since Britain voted to come out of the EU, a 40% increase, is a depressing figure for UK business as a whole – however it is ‘fodder’ for Begbies Traynor (LON:BEG), the leading independent insolvency firm.

We will get evidence of these facts when the company reports its interim results for the six months to end October on Tuesday 10 December.

The group’s executive chairman, Ric Traynor, gave some fairly strong indications at the mid-September AGM of thebusiness recovery, financial advisory and property services consultancy.

He stated then that already the first quarter of the current year, which ends on 30 April 2020, had seen all areas of the business performing well. Revenue and profit growth in that period was in line with expectations.

I expect that strength to have continued up to the end of October, with even greater returns due in the second half year.

Over the last year or so the company has been investing in its organic growth, as well as making some very strategic and targeted acquisitions. Those new businesses coming under the company’s wings widen the breadth of Begbies’ service lines and give it added sources of future growth.

It not only has insolvency services but also business transfer, chartered surveying, corporate finance, property and machinery auction, business restructuring, due diligence and transaction support, forensic accounting and investigations, specialist insurance and vacant property risk management, even transport planning and design.

Not only is the group’s service range interestingly wide, but it is also widely geographically spread too.

As it increases its scale and its offer it is also able to benefit from such a spread of activities, which are all extremely useful in its basic business.

Traynor now considers that some 65% of the group’s income is derived from counter-cyclical business, namely insolvency, advisory and property services, which provide an excellent balance for the group.

The company in the first half of the calendar year enjoyed a 9% increase in its national corporate insolvency appointments. It handles the largest number in the UK, typically serving the mid-market and smaller company sectors, taking an 8% market share.

The AIM-quoted company has 127,630,936 shares in issue, of which Ric Traynor holds 21.29% and his Board colleagues another 1.65%.

Institutional holders include Hof Hoorneman Bankiers (9.07%), Fidelity Worldwide (6.94%), OVMK Vermogensbeheer (5.73%), Close Brothers Asset Management (5.05%), Miton Group Asset Management (3.33%), Allianz Global Investors (3.17%), Hargreaves Lansdown (2.89%) and Amati Global Investors (2.88%).

The two years to end April 2019 saw group revenues rising from £52.4m to £60.1m, with adjusted profit before tax increasing from £5.6m to £7.1m. In that period the earnings rose from 4p to 4.9p and the dividend improved from 2.4p to 2.6p per share.

Net debt was lower at £6m, down from £7.5m in 2018, a good indication of the company’s strong cash generation.

For the current year, revenues of an estimated £66m could generate almost £9m in pre-tax profits, with earnings of 5.8p and a 2.8p dividend per share.

£72m of revenue for next year, could give £10.5m in profits, 6.75p in earnings and 3p in dividends per share.

Brokers Canaccord Genuity and Shore Capital both rate the shares as a Buy.

Capitalised at around £110m, with its shares trading at around the 85p level, I consider that they are inexpensive and a wonderful counter-cyclical investment, against the vagaries of both the UK economy and the market over the next year or so.

My target price by the end of 2020 is 110p.