Begbies Traynor – distress is good business

Mark Watson-Mitchell has increased his price target for shares in insolvency group Begbies Traynor, ahead of the firm’s results due next week. 

Next Tuesday will see this leading business recovery group declare its results for the year to end-April this year.

Securities house Canaccord Genuity recently upped their price objective for this group’s shares from 109p to 128p. That increase followed the group at the end of May announcing its Trading Update for their finals – which effectively suggested that the Covid-19 outbreak will be good business for the company.

I have been a fan of Begbies Traynor (LON:BEG) for some years and I consider that the market is severely underrating its shares, now just 96.4p.

It really is a classic ‘counter-cyclical play’ and the next couple of years, as corporate UK comes to terms with exactly how its balance sheets have been impacted, the services of Begbies Traynor will come very much to the fore.

The £123m valued group considers itself to be amongst the leaders in its chosen professional services, advising clients on establishing, protecting, enhancing and realising the value of their assets and businesses throughout the economic cycle.

And that economic cycle is currently peddling backwards due to the virus.

It is at times like these that the group’s consultants come to the fore, giving advice and even handling complete restructuring whilst helping the UK’s companies back to corporate health.

The group’s corporate and personal insolvency side handles the largest number of corporate appointments in the UK, principally serving mid-market and smaller companies.

Its corporate finance services cover the buy and sell side support on private company transactions.

The financial advisory operations cover forensic accounting and investigations, debt advisory, business and financial restructuring, due diligence and transactional support.

Its services also include valuations of property, businesses, machinery and business assets.

On its transactional services side it takes in the sale of property, machinery and other business assets through physical and online auctions; business sales agency; and commercial property agency focussed on northern and eastern England.

The property consultancy, planning and management service covers building consultancy, commercial property management, specialist insurance and vacant property risk management, transport planning and design.

It is therefore very evident that Begbies Traynor’s consultants can help any company, or individual, in difficulty within the corporate sector.

Canaccord Genuity, who noted that the UK insolvency market grew by 7% in 2019, are forecasting that the group’s business recovery division should enjoy 8% organic growth in 2021 and 10% in 2020.

With the prospects of severe recession, being the result of the combination of Covid-19 and the Government’s intervention measures, the group should inevitably pick up significant business over the next couple of years.

The group acted quickly in response to the lockdown, rapidly enabling the majority of its employees to work remotely and securely, whilst continuing to provide advice and support to its clients.

It has continued to be in a strong financial position with plenty of banking facilities.

Next week’s results announcement could see pre-tax profits rising 260% to £9.18m on the back of a revenue increase of just £10m to £70.19m, that should see earnings of 5.67p per share.

A modest revenue increase for the current year should see £74m help to push profits up to £10m, worth 6.25p per share in earnings.

The big leap could come through in the year to end-April 2022, with revenue up to £80m and profits jacking up to £13m, worth 8.25p in earnings.

There are 128m shares in issue, of which boss Ric Traynor holds 21.26% of the equity.

Other large holders include Hof Hoorneman Bankiers (9.28%), OVMK Vermogensbeheer (5.47%), FIL Investments (4.94%), Close Asset Management (4.63%), Hargreaves Lansdown Stockbrokers (4.51%), Amati Global Investors (4.31%), Clearstream Banking (3.25%), Allianz Global Invetors (3.16%) and Nordea Investment Management (2.80%).

Because it has massive upside growth potential, I consider that these shares, now 96.4p, should be trading at a premium to the market generally.

Accordingly, even in front of next Tuesday’s results, I now upgrade my target price for its shares to 125p and that is ‘short-term’.

Profile 26.11.19 @ 85p set a Target Price of 110p*.

Profile 21.04.20 @ 93p set a Target Price of 110p*.

(*denotes that Target Prices have been previously achieved.)