- The company's restructuring unit offers counter cyclical defensive qualities
- There is a high recurring income stream from tax advisory services
- Organic growth is complemented by bolt-on acquisitions
It pays to seek out companies that are likely to benefit from earnings tailwinds in the current market environment. A below the radar professional advisory service provider that assists UK small and medium-sized enterprises does exactly that.
The UK economy faces challenging trading conditions as consumers rein in their spending and corporates battle with higher input costs. Insolvencies are already rising sharply, meaning there is demand for the services of one Aim-traded company, which is seeing a sharp uptick in business for its corporate restructuring unit. The group also has a growing recurring revenue stream from tax advisory activities, and is working on a bumper pipeline of M&A transactions as SME (small to medium enterprises) business owners sell up. Rated on a modest forward PE ratio of 12 and offering a prospective dividend yield of six per cent, its solid trading prospects are being undervalued.
A counter-cyclical recession play
Demand in the UK insolvency market is expected to grow materially following the removal of UK government support that was offered to SMEs during the Covid-19 pandemic, and due to the challenging economy. The latest S&P Global/Cips flash UK composite output index, a measure of activity in the private sector, dropped to a 21-month low this month and remains in contraction, highlighting mounting recessionary pressures facing the UK economy.
In addition, the dramatic repricing of UK government debt this year is expected to accentuate corporate insolvencies as zombie companies that had been kept on life support during the zero-interest rate policy environment face their day of reckoning. The ongoing rise in the Bank of England Base Rate also means that more over indebted companies are in danger of breaching their interest cover covenants, especially as input cost pressures continue to erode trading profits across many sectors.
This is an unhappy backdrop, but one that is positive for this company's restructuring division which offers a wide range of insolvency and restructuring services including formal insolvency appointments, creditor representation, and liquidations.
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