As an insolvency practitioner, Begbies Traynor (AIM: BEG) offers investors a hedge against an economic downturn. Fortunately for the rest of us, the company has had to fight the headwind of the long economic expansion which followed the financial crisis. The peak year for insolvencies was 2009 and last year marked the lowest number of corporate failures since 2004.
Insolvencies picking up
As a result the focus has been on controlling costs and making acquisitions which fit with insolvency work, while also offering some diversification.
Last year saw broadly flat revenues and profits. There was a seasonal uplift in second half activity and this seems to have continued into the first quarter of 2017 with insolvencies up 8 per cent on the prior year. Begbies is the largest practitioner by volume, having a 7 per cent share serviced from over 30 regional offices. With major corporate failures the domain of the large accounting firms, Begbies mainly handles work from the SME sector.
The team has shrunk over time, reflecting market conditions, and costs are expected to be fixed over the coming year. This leaves the company with 10 per cent spare capacity to cope with an upturn, with Chairman Ric Traynor saying he could manage up to 20 per cent more volume at a stretch. So there’s good gearing to an upturn in demand should the corporate sector start to struggle. Current margins in the 20 per cent region should be secure and could expand to 25 per cent in a stronger market.
Fees are also generated from corporate advisory work surrounding restructuring and forensic analysis, which fits well with the core insolvency business. Similarly the property division handles valuation and auction work which often relates to corporate distress, though there is an element of non-cyclical business too. Further acquisitions are likely to build up these two divisions.
Cash flow was good last year, helped by working capital movements, and net debt ended at £10 million. There’s a £30 million total debt facility to support management’s acquisitive ambitions, and they would like to do another deal this year.
At 50p the shares are towards the top of the tight range they’ve occupied for the last three years. This puts them on a current year p/e of 13.4 and yield of 4.4 per cent, which will look quite interesting if the economy starts to soften or interest rates finally go up.