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Begbies Traynor ‘pessimist trade’ still cheap

Acquisitions meant the insolvency practitioner grew at a clip last year, despite a tricky backdrop
Begbies Traynor ‘pessimist trade’ still cheap
  • Company expects insolvency activity to pick up from here
  • Bolt-on strategy has helped drive operational gearing

There are couple of points investors need to understand about the current state of corporate insolvencies in the UK, which serve as the key market for professional services group Begbies Traynor (BEG).

The first is that rising numbers are somewhat deceptive. According to government data, there were 1,207 registered company insolvencies in June, 63 per cent more than the same month a year earlier. But skip back to June 2019 and 1,466 insolvencies were registered.

This suggests that despite considerable levels of corporate distress in the UK economy, firms continue to be propped up by state support. While Begbies told us that appointments continue to climb, HMRC plans to go easy on struggling businesses, despite being granted preferential creditor status in insolvencies involving outstanding VAT and income tax.

Little about Begbies’ current trajectory suggests retrenchment, mind. Despite the headwinds, all areas of the group reportedly performed well in the 12 months to April, and operating margins ticked up 50 basis points to 14.8 per cent, as both underlying trade and bought-in growth juiced the top line.

Strip out lease liabilities and the period also ended with in a net cash position, despite the acquisition of fellow restructuring specialists CVR Global in January and David Rubin & Partners and March. Those deals are also reflected in a 50 per cent swell in current trade and other payables to £33m. Current receivables grew at half that rate, to £45.4m.

The deal-making pipeline remains strong, and the group continues to hunt for smaller professional services teams specialising in corporate finance, property and even quantity surveying. This focus on small teams of owner-professionals has built diversity in the business, and operational leverage with it.

In the last five years, as headcount has climbed from 547 to “almost 1,000” since the latest acquisitions, the ratio of fee earners to support staff has doubled.

FactSet-compiled consensus forecasts are for adjusted earnings of 8.98p per share for the financial year to April 2022, up from an estimate of 6.51p two years ago. The backdrop has changed considerably since then, but the shares still trade on a forward price-to-earnings ratio of 14. With demand for Begbies’ services set to rise and recent acquisition benefits yet to be reflected in the cash flow statement, this pessimism trade still looks cheaply-valued.

Analysts at Canaccord think a premium rating of just under 17 times’ this year’s adjusted profit forecast is warranted, and we’re inclined to agree. Buy.

Last IC View: Buy, 90p, 08 Dec 2020

BEGBIES TRAYNOR (BEG)  
ORD PRICE:128pMARKET VALUE:£194m
TOUCH:128-130p12-MONTH HIGH:150pLOW: 80p
DIVIDEND YIELD:2.3%PE RATIO:N/A
NET ASSET VALUE:56.8p*NET DEBT:7%
Year to 30 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201749.70.60.22.2
201852.42.31.32.4
2019 (restated)60.13.32.02.6
202070.52.90.72.8
202183.81.90.13.0
% change+19-34-86+7
Ex-div:07 Oct   
Payment:04 Nov   
*Includes intangible assets of £77.6m, or 51.1p a share.