Get a corona-crisis hedge with FRP Advisory

Step forward corporate restructuring outfit FRP Advisory (FRP), which listed on Aim amid March’s market chaos, at 80p per share. This debut looks well-timed for a surge in the number of mandates, as demonstrated by appointments to advise on the administrations of mid-market restaurant chains Carluccio’s and Prezzo in recent weeks. But there are several important aspects of FRP’s business model that make it ideally placed regardless of the flow of tendering activity.

For a start, the group is led by its corporate restructuring work. This means FRP is conflict-free, unlike the Big Four and mid-market professional services firms which are constrained by their audit-led client relationships and increasingly focused on larger restructuring work. Being on the panel of all 13 of the UK’s major lenders also helps. Second, FRP has a strong reputation among creditors for its ability to recover full values for businesses or assets, which helps the company defend its charge-out rates for staff.

Owing to the complex nature of this work, it is also very profitable. Broker Cenkos reckons the adjusted Ebitda margin has trended at 27 per cent since 2017, and could rise to 30 per cent as FRP’s profile expands with larger projects. That’s an encouraging sign when you consider that recent client engagements have included brandnames such as department store Bhs, cake maker Patisserie Valerie and electronics retailer Maplin. With a sector-agnostic approach, the group is also the largest administrator by number of appointments.

Of course, the business is not without its own risks. Restructuring work is typically carried out on a contingent fee basis, meaning bills can take longer than other services companies to be paid, and are typically accounted for net of a provision that reflects recovery risks. Earnings visibility is also choppy. That hasn’t held back a strong track record of growth since it was formed in 2010, as seen by a top-line compound annual growth rate of 15.2 per cent, despite a benign backdrop for activity.

Citing what it sees as a “superior business model, track record of growth, pipeline of client projects and future returns profile”, Cenkos believes the shares should trade at a 55 per cent premium to insolvency practitioner Begbies Traynor (BEG). That explains the brokerage’s 131p price target for the stock, although to our mind there is considerable scope for FRP to beat Cenkos’ 2 per cent forecast increase in adjusted pre-tax profits for the current financial year. The likely increase in tax liabilities in the 12 months to March 2021 explains the dip in adjusted earnings per share in the table below.