Begbies Traynor: a business for all seasons

The government recently reported that insolvencies in England and Wales increased by 40 per cent year on year through May. An increase of that magnitude is unlikely to be a statistical blip, and it may be that the full impact of a year-and-a-half of rising interest rates is only just becoming apparent. Wherever we are in terms of the business cycle, conditions have certainly improved for insolvency practitioners and specialist financial advisory firms.

Begbies Traynor (BEG) provides a case in point. The group’s business offering provides a degree of counter-cyclical protection for investors, but its range of services has expanded appreciably over time. Indeed, from “a standing start in 2014”, revenues from non-insolvency work now constitute 40 per cent of the group total and are supported by healthy rates of recurring revenue strands. Overall revenue growth of 11 per cent was split between organic and acquired sources and the group continues to broaden its geographical footprint.

Adjusted operating profit increased by 17 per cent to £21.8mn, aided by a one percentage point increase in the underlying margin to 17.9 per cent, a reflection of the “continuing increase in [Begbies’] scale and service offerings”.

In July 2022, the group acquired Mantra Capital, a London-based property finance brokerage, to complement an earlier deal to acquire the MAF Finance Group. In addition, Begbies added three chartered surveyors' practices to its roster in the period under review, enhancing its reach in Eastern England and South Yorkshire in the process. Despite the buying spree, the net cash outflow from investing activities was broadly in line with the prior year due to £1.16mn in net cash acquired as part of the deals, set against £10.6mn of acquisition and deferred consideration payments. The group generated free cash flow of £14.1mn, while dividend payments were up by 17 per cent.

Equity Development gives a forecast adjusted EPS of 10.3p a share, against 10.5p in FY 2023 due to “tax rates and issuance” considerations, while keeping its target price at 175p.

Ric Traynor, group executive chairman, pointed out that “between 2019 and 2023, [the group] has doubled revenue and tripled adjusted profit before tax, from a combination of organic growth and acquisitions”. Revenue from formal insolvency appointments also doubled over that timeframe and we might realistically expect further increases in work volumes over the coming months, although whether this will result in increased market share is difficult to gauge. Nevertheless, we feel an adjusted forward rating of 13 times is not overly demanding given the consistent dividend growth and counter-cyclical benefits on offer. Buy.    

Last IC view: Buy, 139p, 13 Dec 2022