Begbies Traynor waiting for reality

With the government ruling nothing out in its efforts to contain the spread of the Omicron variant, speculation is mounting that chancellor Rishi Sunak may once again be asked to provide emergency fiscal support for struggling businesses.

On the morning Begbies Traynor (BEG) released half-year numbers, the Westminster press pack was reporting furlough and state funding for businesses might return if harsher social distancing rules are reintroduced. For the insolvency practitioner’s executive chairman, Ric Traynor, any such measures would merely delay the process of “businesses getting back to face reality”.

Although applications for state-guaranteed business loans closed in March, furlough support remained in place for a good chunk of the period covered by Begbies’ half-year results.

For distressed firms, this reality was forestalled. For Begbies, this meant depressed trading in the business recovery and financial advisory division, which saw a £0.6m dip in organic revenues, owing to a higher volume of lower value cases. The jump in the top line in the period was almost entirely due to bolt-on deals in the period, although increased instructions for the lower-margin property arm added about £1.6m to turnover on a like-for-like basis.

Now, just a few pandemic-linked company protections remain in place, although they are consequential for Begbies’ end of the market. Until April, small businesses will be guarded from winding up petitions on any creditor claims below £10,000 and given up to three weeks to come up with repayment proposals.

This has had the effect of suppressing the numbers of small- and medium-sized cases Begbies typically handles, although liquidations are reported to be back to pre-pandemic levels. Administrations, which generate more fees, are still well below historic levels, although acquisitions mean Begbies has taken its share of the overall market from 10 to 14 per cent.

Citing a further anticipated pick up in insolvencies by the April financial year end, management is confident of hitting analyst expectations for adjusted pre-tax profits of between £17m and £18.5m.

FactSet-compiled consensus earnings forecasts – again heavily adjusted to account for the near-routine transaction costs and the amortisation of intangibles – are for 8.9p per share for the current year, rising to 9.8p in FY2023.

That puts the shares just below their five-year average forward earnings multiple of 14 and on a valuation which we have long-argued overweights M&A execution risk and downplays an excellent niche of consistent instructions and profit growth. Buy.

Last IC View: Buy, 128p, 20 Jul 2021