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It may seem inconceivable that an insolvency practitioner would struggle to make hay in the current edgy economic climate, but Begbies Traynor has suffered a hammering in the market after warning that its profits for the year to April could be as much as 20 per cent below last year's.
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The major problem for Begbies is the time lag between the credit markets clamming up in August and September, and the full effect being felt in the economy. Begbies reckons the opening half of its financial year, to the end of October, was one of the quietest periods for corporate insolvencies for 20 years, as the market was awash with easy credit. This resulted in a 5 per cent fall in activity levels in its insolvency business.
Despite this, Begbies has continued with its growth plans, making small acquisitions, adding new offices of its own and beefing up its central operations, all of which has added to the cost base and hampered profitability.
But, according to the company, this leaves it particularly well prepared for the upswing in business it is only now beginning to experience, some four months after the credit markets began to close down. This should lead to vastly improved market conditions in 2008 and Begbies is well placed to take advantage - but it will not be sufficient to save the current financial year's performance.
Charles Stanley has slashed its full year profit forecast by 40 per cent to £6.6m, well below last year's £9.3m. Investor confidence has taken a heavy knock, with Begbies' shares down 36 per cent at 90p.
Begbies' shares are now well down on our buy recommendation (164p, 16 February 2007) but should find some support at this level, valued at 16 times earnings with a dividend yield of 3 per cent. With economic conditions worsening and credit markets tight, conditions could just swing back in Begbies' favour and it remains a speculative buy.
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-IC-1.9.0c-prod - 15/05/2009 11:00:33 - stuart.turner
