Debt management venture Invocas has been a volatile performer since it joined AIM last year, but don’t let this put you off. The severe movements in the share price have more to do with the machinations of the sector it operates in than any fundamental uncertainty about its core business. In our view, it is likely to prove a winner as this industry undergoes another bout of regulatory tightening in the face of the growing clamour for its products.

Led by major shareholder and chief executive John Hall, Invocas is a provider of protected trust deeds (PTDs), the Scottish equivalent of the individual voluntary arrangement (IVA) process in England, Wales and Northern Ireland. (An IVA is an alternative to bankruptcy proceedings, whereby someone makes a voluntary arrangement with their creditors through the law courts for the settlements of debts.)

Invocas’ growth prospects are underpinned by its unique place in the Scottish market, where it is the number-one PTD supplier. In a nutshell, Scottish consumers are borrowing just as much as their English cousins (total personal debt in the UK goes up by £1 million every four minutes), but are funding this debt from a generally lower income and asset base. This logically leads to problems and so it is not surprising that demand for PTDs is increasing north of the border, although consumer awareness of the product is perhaps three years behind that of IVAs in England.

That said, Hall is keen to point out that ‘we have a different model to the English IVA companies’, which are of course unable to operate in Scotland. ‘We don’t advertise as all of our work is won through relationships with providers, so our cost of acquisition is nil,’ he adds. ‘And we don’t remunerate through commission, which goes against, and is incompatible with, best advice.’

Hall highlights unique minimum case acceptance criteria regarding PTDs, where Invocas only accepts cases that will ‘result in a successful outcome’ – and that balance the interests of creditor and debtor alike.

Maiden interim results from Invocas made happy reading for investors as they demonstrated good progress despite the set-up costs of Newtomorrow, a new helpline/website service offering the ‘right advice, first time, every time’. Turnover rose 50 per cent to more than £4.1 million, with 80 per cent of sales wrought from trust deeds – new appointments grew by 41 per cent to 731. The balance arose from bankruptcy work and corporate insolvency services. Profits improved 26 per cent to £1.6 million and the half ended with a healthy £2.6 million cash on the balance sheet.

Invocas’ share of the trust deeds market rose from 14.2 per cent to almost 17 per cent, despite its extra-stringent approach to cases, and the group won share in the corporate market, maintaining new corporate appointment cases in a liquidations market that actually decreased.

Hall’s growth strategy entails cementing ties with traditional work referrers such as solicitors, English IVA firms with Scottish clients and other debt management companies, as well as nurturing ‘affinity’ referrals from intermediaries and consumer lenders.

Newtomorrow, its direct offering to debtors as well as affinity partners, lenders, and intermediaries, will help with this development. Further acquisitions of similar and complementary businesses that help create Hall’s hoped-for ‘one-stop shop for personal debt solutions’ are under consideration, though Hall has baulked at more than one deal that failed to match his strict acquisition criteria.

Much like his more respected peers south of the border, he welcomes calls for further industry regulation, which he says should ‘drive out the cowboys and help the good guys’. The Government’s legal interventions will possibly throw up some attractive acquisitive nuggets in a sector in need of a shake out.

Analysts think profits could spiral to £3.3 million (£2.4 million) this year, before a move to £4.5 million by March 2008, when earnings are forecast to burgeon 34 per cent to 10.7p, placing the shares on a prospective p/e of just over 17 and a PEG ratio of 0.5. Strong buy.

Invocas	AIM	£8.28m	29.00p	0.00p
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