BULL POINTS:
■ Insolvency work still rising
■ Diversifies revenue stream
■ Strong balance sheet
BEAR POINTS:
■ Cash flow constraints caused by late payments
■ Corporate finance division loss making
Recessions are less than pleasant for nearly all companies, but Begbies Traynor is a notable exception. That's because it makes most of its revenue from insolvency work, one of the few growth industries during recession. Its turnover in the year to April 2009 was up 29 per cent as the downturn took root. And with banks under severe pressure from the government to avoid enforcement against their business customers wherever possible, Begbies reckons that insolvencies in the second quarter will have risen by around a third from a year earlier, to 6,500.
While insolvency continues to be the main source of revenues, Begbies has three other divisions. Of these, the tax division - which covers consultancy and tax advice both to individuals and companies - saw turnover jump 170 per cent to £7m, although there was a slowdown in the second half of the financial year as clients cut back on spending.
Of the other divisions, corporate finance remains a worry. Turnover more than halved in the year to April, resulting in loss of £1.1m. Begbies has responded by restructuring the unit, including shifting some staff into its insolvency practice. That's brought operating losses under control, but there is little sign yet of any appreciable upturn in the corporate finance market. Even so, Begbies is keen to maintain a corporate finance presence to capitalise on improved demand - and an inevitable fall in insolvency work - when economic conditions improve. For now though, the insolvency side should be busy for some time to come, with individual companies' financial difficulties expected to persist long after the economy starts to recover.
| BEGBIES TRAYNOR (BEG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 105p | MARKET VALUE: | £ 93.7m | |
| TOUCH: | 103-105p | 12-MONTH HIGH: | 202p | LOW:88p |
| DIVIDEND YIELD: | 3.0% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 71p* | NET DEBT: | 27% | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 33.2 | 4.80 | 4.20 | 1.50 |
| 2007 | 41.9 | 8.50 | 7.30 | 2.50 |
| 2008 | 48.1 | 5.68 | 4.70 | 2.50 |
| 2009 | 62.1 | 7.25 | 5.40 | 2.80 |
| 2010** | 67.6 | 10.1 | 8.90 | 3.10 |
| % change | +9 | +39 | +65 | +11 |
Normal market size:2,000 Matched bargain trading Beta:0.1 *Includes intangible assets of £53.7m or 60p a share **Hardman & Co forecasts, adjusted EPS not directly comparable | ||||
But Begbies itself needs to keep a careful eye on cash flow, though. The banks that appoint insolvency practitioners are famously keen to squeeze their profit margins and will also take as long as possible to stump up any payments. That meant Begbies' year-end trade debtors rose from £29.6m a year earlier to £40.4m. And while operating margins before amortisation and depreciation may still be a very attractive 18 per cent, the lock-in period for being paid is now around 192 days. However, working capital was boosted by a successful £12.5m share placing late last year, while at the April year-end there was still nearly £12m undrawn on the company's banking facilities.
