Pick of AIM by James Crux

Unlike most growing businesses, the recent easy availability of credit has not helped Begbies Traynor but has hindered the business rescue, recovery and restructuring specialist. Ric Traynor, chairman and 32.5 per cent shareholder, had to issue a profits alert in December reflecting exceptionally subdued activity in last year’s corporate insolvency market.

I chatted to Traynor as, for the first time since floating the business in 2004, he unveiled results that failed to show profits progress. Interims revealed a 43 per cent drop in profits to £2.1 million, on negligible sales growth to £22 million, yet the numbers were achieved against a challenging market backdrop and in the wake of the global credit crunch, the worm has definitely turned.

‘Begbies’ latest ‘Red Flag A!ert’ statistics, monitoring distress signs such as wind up petitions and county court judgement issuance, show the numbers of distressed companies rising, particularly in the last quarter of 2007. If the trend continues, tipping more companies into insolvency, the benefits will be felt at Begbies’ bottom line.

‘We saw the bottom of the barrel in 2007 in terms of insolvency,’ remarked Traynor, ‘but now, we are seeing a reversal of fortune.’ The upturn in corporate insolvency will fully justify his decision to continue investing and acquiring throughout the lean times. Though the bulk of the business relates to business insolvencies, the group has cannily broadened its service range into areas such as corporate finance, investigations, commercial finance, risk management and specialist tax. Over time, there are opportunities to cross-sell such services across the client base.

For April 2008, City number crunchers expect a short-term profits dip from £8.3 million to £7.1 million, ahead of a return to form in 2009, when dramatic profits resurgence to £11 million and 8.8p of earnings are forecast. On 2008 estimated earnings of 5.6p, the 123p shares (down from a 52-week peak of 179.5p) trade on a 2009 price-to-earnings multiple of less than 14 times. To my mind, Begbies Traynor is great value.

Bullish on Southern Bear
Despite a mild earnings alert in December, related to contract timing ‘slippage’ rather than anything fundamental, investors would do well to get their paws on £8.9 million mini-conglomerate Southern Bear, chaired by respected veteran Jon Pither (who also chairs another curiously named counter, Northern Bear) and backed by astute investor Nigel Wray.

Having reversed into failed shell Croatia Ventures in 2006, Southern Bear set about a brief to buy £1 million to £10 million revenue businesses in the support services, industrial and engineering sectors. ‘Targets must have good senior management, a profitable record, ideally cash and no debt,’ says director John Green.

Growing, profitable ventures clawed together include industrial process pipe-work systems outfit Travail (whose key client is GlaxoSmithKline), welding products importer and distributor Towerinput and Phoenix Dynamics, which supplies components and equipment to the electronics, defence and energy industries.

I glean particular excitement from Green regarding September’s takeover of support services outfit BGC, a provider of domestic gas heating and electrical installation and maintenance services throughout the North West, Midlands and North Wales. Green considers BGC ‘recession proof’ since it carries out work for housing associations and council houses in a government-backed market.

‘We have built a group with annualised profits of £2.5 million and we have £1.25 million cash in the bank,’ says Green, who continues to cast an eye over further deals. Trading on roughly 3.5 times profits versus a support services average in the high teens and 20s, the shares should have further to go.