Capitalising on the crunch

For most people, the credit crunch has become a prolonged nightmare. Almost everyone is feeling the pinch, from private individuals facing negative equity or repossession of their homes, the removal of credit or the loss of jobs, to businesses saddled with unsold goods and cash-strapped customers.

But there is one group of companies whose experience is very different. Quoted on AIM, they specialise in activities which thrive in bad times and some are rubbing their hands at the prospects now unfolding.

‘There is a great deal of excitement here,’ reports David Horne, finance director of GoIndustry-DoveBid, which auctions industrial machinery and equipment, helps companies manage surplus assets and conducts valuations for asset-based lenders. ‘My colleagues have a glint in their eye and are saying: “Bring it on”.’

Built up as GoIndustry by chief executive John Allbrook from an AIM shell into a major sector player, the company pulled off a transformational £17 million merger with leading US rival DoveBid earlier this year.

But it fell foul of the City by warning the costs of this would cause a shortfall from expected 2008 profits of £5.2 million.

Horne argues the enlarged group can cut out £4 million of costs in the first year, while it manages surplus assets for ailing corporate giants such as Ford Motors or major drug groups such as Pfizer as they dispose of non-reusable equipment. GoIndustry-DoveBid, which is holding discussions about next year’s renewal of £3 million loan notes, is finding new markets for surplus equipment in Eastern Europe and India and is probing China.

‘Now is our time’
More popular with the stock market just now is professional services group Begbies Traynor, which derives three-quarters of its business from insolvency administration. ‘Now is our time in the economic cycle and it should last for five years,’ proclaims executive chairman Ric Traynor.

‘It has been quiet for some time,’ he comments, ‘and we have had to grow by acquisition’. Now, with insolvencies returning to levels not seen since the mid-1990s, ‘we hope to grow 15 to 20 per cent a year organically’.

That will please followers, underwhelmed by Begbies Traynor’s £2 million profit fall to £7 million in the year to April. The business only began to recover in the second half from a sluggish 2007, though it picked up some notable mandates, including Silverjet and Carlyle Capital Corporation.

‘We are mostly in the mid-market’, explains Traynor. He says a typical contract is for administration of a company with £20 million annual turnover and generating fees of £50,000 over three years, with most of the work and payment in the first 12 months.

The company also has a corporate finance arm, to advise companies on avoiding going bust. ‘Too many people don’t want go to an insolvency practitioner and are more comfortable seeing a corporate finance department’.

If you don’t wish to find yourself from corporate finance to insolvency, Traynor has one word of advice. ‘Speak to us as soon as you can, while you’ve still got the option’.

Profits surge from Penna
Advice of a different sort is on hand from management consultant Penna Consulting, among other things Britain’s leading outplacement specialist, which has recently finished a big restructuring and downsizing project for financier Guy Hands at music group EMI. With corporate clients covering 60 per cent of the FTSE100 share index and 70 per cent of the banks, Penna is retained exclusively for outplacement by the Department of Work and Pensions.

Chief executive Gary Browning says the company is ‘50 per cent counter-cyclical’ and stands to benefit equally from activity generated during an economic upswing. The tightly held Penna, which lifted profits fourfold from a depressed £500,000 to £2 million in the year to March, is ‘dominant in the City’, according to Browning, who adds, ‘we are of an acquiring mindset at the moment’.

‘It’s tough out there, but we are fortunate,’ argues Paul Jackson, chief executive of accountancy and professional services concern Vantis. ‘Two-thirds of our revenue comes from business advice. Business recovery, including bankruptcy and insolvency, is moving up to a quarter’.

Vantis, which raised profits 16 per cent to £10.9 million last year, reckons the recession could last longer for smaller companies than larger, which should help its work on administrations and asset-based lending. ‘We are not enjoying it’, maintains Jackson, but the balance is one that gives us comfort’.

Pawnbrokers see growth
If anyone should thrive in a credit crunch it should surely be the pawnbroker, though, as yet, the impact has been modest, because they tend to cater for lower income groups rather than stock market losers needing to hock their heirlooms. Greville Nicholls, chief executive of market leader Albermarle & Bond with 112 branches and a £24 million pledged loan book, suggests ‘it’s a gentle notch up, not a sudden flood’.

Typically charging seven to eight per cent a month for a £120 loan on gold jewellery which is on average redeemed in three months, the ‘unashamedly down-market’ Albemarle has been acquisitive. The purchase of fellow pawnbroker Herbert Brown facilitated a 47 per cent profits increase to £10.3 million last year – helped by a strong gold price. For now, Nicholls says it is not the time to expand further by increasing debt.

Pointing out that pawnbrokers must return any surplus on sales of unredeemed items to clients but cannot by law recover any deficit from them, Nicholls says many practitioners see one area of potentially ‘explosive’ growth. That is in ‘paid advances’, to fund employed people, ‘typically clerical and shop workers’, £200 to £300 until next payday. This is ‘huge business’ in the USA and even higher charges are charged because, unlike traditional pawning, it is not secured on assets.

With a £30 million pledged loan book, fellow pawnbroker H & T Group is similarly cautious, despite a near-80 per cent annual profits leap to £5.5 million, helped by expanding outlets to 104. Chief executive John Nichols (no relation) says the best part of the credit crunch is the spotlight it has thrown on pawnbrokers – ‘a marketing campaign like that would have cost millions’.

With average loans of £120 redeemed on average in 3.3 months, Nichols says ‘we are getting more customers in, but they are mostly people who have always used pawnbrokers’. He suggests some unquoted upmarket pawnbrokers may be enjoying a more dramatic upsurge.

‘Cash is king’
Lending small sums to people who have been denied larger amounts of credit elsewhere is fuelling growth at home-credit and motor finance specialist S&U, claims chairman Anthony Coombs. The company, whose profits in the six months to July rose a modest 7.5 per cent to £5 million on flat turnover, is ‘gaining market share’, says Coombs, as weaker brethren suffer. With a significant portion of collections funded by state provision in the form of working families’ tax credits and incapacity benefit, S&U is growing both sides of its business, ‘in a very competitive market’, says Coombs. He argues the company has a philosophy of ‘relationship lending’ – with home credit loans ranging from £200 to £1,000 and car loans averaging £4,500 – and can ‘accommodate people in genuine difficulties, who pay smaller amounts’.

S&U is moving towards offering shorter-term credit, as it puts it to ‘allow all our customers more frequent refinancing opportunities, and says it is winning additional new customers through its new web site. Coombs says funding, with £10 million facilities maturing next year, should be facilitated by strong cash flow and, with gearing at 74 per cent, might even consider acquisitions ‘on the right terms – though cash is king’.

Elsewhere, debt management specialist Relax Group, formerly Debts.co.uk, is pursuing organic growth and possible acquisitions, as it switches its business focus from handling individual voluntary arrangements (IVAs) to debt-and-arrears book management. Chief executive officer Paul Carter says debt management plans handled by the company have risen 30 per cent year on year and wants to expand its mortgage business, even in today’s climate.

Having transformed the company by buying PB Recovery and Relax Finance for a combined £4.25 million, Relax remains out of favour with the stock market, which expects a significant profits fall this year. However, if Carter’s strategy pays off, next year could bring a strong profits surge.

The companies are a mixed bag. Begbies Traynor, Penna and Albemarle & Bond look fairly resilient, but the others could do well, provided they manage to weather current conditions and put their hopes into reality.