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BEGBIES TRAYNOR (BEG)

Created:

16 February 2007

164p - Aim - Last week's decision by the Bank of England not to raise interest rates will have come as a relief to many struggling businesses. But the long-term trend is clear: rates have risen three times in the past six months, and the futures markets are predicting another rise later this year. That will keep the pressure on companies that have borrowed heavily, but it should also provide strong conditions for Begbies Traynor, which provides corporate insolvency advice.

First-half results last month showed that the group produced solid organic growth of 16 per cent - although that was due to winning market share rather than growth in the corporate insolvencies. Rising interest rates have not yet led to a corresponding increase in corporate distress - the latest figures from the Insolvency Service show that the overall market was flat in the final quarter of 2006, with a rise in compulsory liquidations being offset by a fall in voluntary liquidations. Neverthe-less, executive chairman Ric Traynor expects insolvencies to increase as the year progresses, with rising interest rates increasingly taking their toll on overstretched businesses.

Although such an increase is expected, Mr Traynor is not relying on it to keep sales and profits moving forwards. He has big plans for the future and is well on his way to fulfilling his most recent strategic aim: turnover of £50m at an average profit margin of 20 per cent or more by the end of this calendar year. But, never one to rest on his laurels, he's now set another target. This time, he's aiming for turnover of £100m by 2010, again at a margin of at least 20 per cent.

Getting there will require a mixture of organic and acquisitive growth, and expansion into new areas. Reaching the target will involve increasing turnover from insolvency work by 25 per cent to £50m a year. It will also involve more than doubling turnover from both corporate finance and investigations, to £10m each. Moves are already afoot on the corporate finance front. Earlier this month, Begbies announced the acquisition of Newcastle-based Quantum Corporate Finance for an undisclosed sum. That deal gives Begbies a fourth corporate finance team but, just as importantly, it gives it a presence in the north-east of England from which it can cross-sell other services.

The remainder of the targeted increase in turnover will come from expansion into new services, such as valuation and disposal of assets, legal work, debt tracing and collection. It may also see expansion overseas. More acquisitions are on the cards and, with low debt and £10m of unused banking facilities, Begbies should not have any problems financing them - although Mr Traynor admits that the group may seek to strengthen its balance sheet with a share issue some time in 2007.

One area of uncertainty is the consumer debt sector. Like many companies, Begbies had initially seen the consumer individual voluntary arrangement (IVA) market as attractive, and it made an acquisition in that sector last year. But it soon went off the sector and, in its first-half results, announced that: "We have decided not to expand our position in [the IVA] market aggressively until there is clarity over maintainable profitability." The decision turned out to be a prescient one - just 10 days later, two of the major players in the consumer IVA market issued profit warnings. Even so, Mr Traynor does see consumer IVAs as part of his plans for the group and expects that Begbies will generate £10m of turnover from that market by 2010.

That uncertainly aside, there's plenty to like about Begbies Traynor and the group's track record suggests that its new expansion plans should be achievable. Although the rating in the table looks high, once goodwill amortisation and exceptionals are stripped out, that falls to 20 times earnings for this year and 17 times earnings for next year. There's also a small, but rapidly rising, dividend to look forward to. Buy.

*Includes intangible assets of £40.9m, or 54p a share

**Shore Capital estimates

Matched bargain trading

Normal market size: 3,000

Beta: 0.7

Last IC view: Good value, 165p, 19 Jan 2007

BULL POINTS

• Rising interest rates
• Aggressive expansion plans
• Past caution on consumer debt market
• Winning market share in corporate market

BEAR POINTS

• High rating
• Flat markets