Begbies Traynor's counter-cyclical attractions

Begbies Traynor (BEG) drove revenues nearly a third higher through FY 2022, but a combination of one-off costs and accounting items sent earnings into negative territory. The business recovery and financial advisory group has been in an acquisitive mood over the past 15 months and a succession of deals has had a profound impact on full-year figures.

The group added CVR Global and David Rubin & Partners to its stable late in its previous financial year, while finance broker MAF Finance Group was acquired in the period under review. The acquisitions have enhanced and broadened the commercial offering within the business recovery and property services segments. The deals have fed through to an increase in market share by volume.

M&A activity has certainly contributed to impressive top-line and free cash flow growth, although the former measure also grew by a healthy 7 per cent on an organic basis. Improved cash generation resulted in a net balance of £4.7mn against £3mn in the prior year and was achieved despite £8.2mn in acquisition and deferred consideration payments, along with share-based payments amounting to £4.6mn. The group was also saddled with standard and deferred tax charges which contributed to the net income loss of £500,000 and resulted in a cash taxation outflow of £3.62mn, up 59 per cent on the prior year.

Leaving aside costs linked to the transactions and amortisation, the integration of the new businesses appears to be proceeding smoothly, at least judging by a 210 basis point increase in the operating margin to 16.9 per cent.

We might reasonably expect further turbulence in the economy for the remainder of this year and beyond as central banks crank up interest rates. As stated, the group is in a net cash position with borrowings amounting to a relatively modest £5.0mn, so tightening credit markets aren’t really material to the group, beyond the likelihood of increased insolvencies in the UK. The group said that UK insolvency numbers have returned to pre-pandemic levels, but it is hard to imagine that the confluence of negative macroeconomic factors won’t lead to an increase in corporate debt delinquencies.

Management is “confident of delivering plans for further growth towards the top end of current market expectations”. Consensus figures compiled by FactSet guide for sales of £116mn for FY 2023, along with adjusted earnings of 9.56p a share, equating to a forward PE ratio of 15 times consensus. This looks good value given the counter-cyclical play on offer. Buy.

Last IC View: Buy, 128p, 20 Jul 2021