Insolvency and restructuring firm Begbies Traynor (BEG) makes money when other companies go out of business, so the current environment of ultra-low interest rates and easy-to-extend loans has been a drag. But trading could soon pick up as an interest-rate rise gets closer and as insolvencies in several hard-pressed industries look more likely as a result of the weak oil price and supermarket price wars. What's more, Begbies' shares offer investors a handsome income to enjoy while waiting for conditions to improve and the group's profits should also benefit from a growth-focused acquisition policy.
- Lowly rated shares
- Likely beneficiary of potential rate rise
- Recent acquisition expected to lift earnings
- Rise in insolvency from hard-pressed industries expected
- No dividend growth forecast
- Low insolvency volumes
Several factors suggest trading should improve for Begbies in the coming year, which is reflected in forecasts of a pick-up in earnings in the 12 months to the end of April 2016 following a number of years of decline. Although insolvencies are at a low in the cycle, the group believes companies exposed to the struggling oil and gas industry, as well as food suppliers suffering due to the supermarket price war, could boost demand. Begbies estimates that food suppliers alone could account for more than 100 insolvencies this year. In addition, local authorities trying to balance their books following the election are expected to turn the screw on wavering debtors, which could also boost demand for Begbies' services.
From a 'macro' perspective, it is worth noting that a growing economy does not mean all companies are in good health. Research by R3, the insolvency professionals' trade body, found that in the third quarter of 2014 154,000 UK businesses were only able to pay the interest on their debts, a 50 per cent increase on the same period a year earlier. A growing number of zombie-like companies means that even a limited interest rate rise, currently forecast for next year, could prove very good news for Begbies. And the group also offers a range of services, such as business turnaround and restructuring - or the increasingly common Company Voluntary Agreements, which are used by troubled firms trying to avert insolvency.
Begbies is also using acquisitions to diversify into new areas and recently bought commercial property surveyor Eddisons for up to £8.5m, part-funded by a placing at 40.5p a share. The deal should immediately add to earnings and the revaluation and disposal services offered by Eddisons are considered highly complimentary to Begbies' core business. What's more, bringing the two groups together is expected to create annual cost savings of £500,000 by 2016.
While we feel Begbies has a considerable amount going for it and could soon start to see an interest-rate-driven pick-up in demand, market sentiment remains negative. That's clearly illustrated by the shares' generous forecast 5 per cent yield. And while the payment is currently not forecast to rise, cover is expected to increase to 2.3 times come 2016 and management remains committed to a long-term progressive payout policy.
| BEGBIES TRAYNOR (BEG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 43p | MARKET VALUE: | £45.2m | |
| TOUCH: | 42.5-45.5p | 12-MONTH HIGH: | 55p | LOW: 39p |
| FORWARD DIVIDEND YIELD: | 5.1% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 56p* | NET DEBT: | 28% | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 57.7 | 7.3 | 6.0 | 2.2 |
| 2013 | 51.1 | 6.7 | 5.3 | 2.2 |
| 2014 | 44.1 | 5.4 | 4.7 | 2.2 |
| 2015** | 48.0 | 5.2 | 4.1 | 2.2 |
| 2016** | 60.3 | 6.7 | 5.0 | 2.2 |
| % change | +26 | +29 | +22 | - |
Normal market size: 7,500 Matched bargain trading Beta: 0.49 *Includes intangible assets of £51.9m, or 50p a share **Canaccord Genuity forecasts, adjusted PTP and EPS figures | ||||
