Is this insolvency practitioner making hay in the recession?
There's one type of business that ought to be doing very, very well during the present downturn. Yup, that's right: insolvency practitioners.
And Manchester-based Begbies Traynor (LSE: BEG) is a rare beast indeed: a publicly-quoted insolvency practitioner, not a private partnership -- allowing investors to profit from others' misfortunes.
In terms of the number of individual cases handled, the business reckons to be the largest insolvency administrator in the UK. High profile cases handled during the last year include Southampton Leisure Holdings plc, the holding company of Southampton Football Club, and Exchange Insurance.
Usefully, as a source of diversification when economic conditions are better, Begbies also take on tax advice work, and get involved in corporate finance -- more of which later.
Up, up, up
Results for the year ending 30 April, announced today, are sparkling. Revenues increased by 29% to £62.1m. Profit before tax was up 28% to £7.2m. Bank debt stood at £13.2m, well within the company's banking facilities of £25m. And the board proposes raising the final dividend by 13% to 1.7p, giving a total of 2.8p for the year, an increase of 12% on 2008.
A combination of organic growth and acquisition have increased Begbies' insolvency capacity. The number of people employed in the insolvency division rose to 427, up 22% from 350 at the start of the year. Headcount in the tax advice arm also rose, to 75.
Management are bullish. The company's Red Flag Alert statistics, published quarterly, monitor corporate distress signals, such as the issue of county court judgements and winding‑up petitions. Its most recent survey, published in April 2009, revealed that the number of UK companies experiencing critical or significant problems in the first quarter of 2009 had increased by 87% and 60% respectively over the same period in 2008.
"We predict that the volume of corporate insolvencies in the period from 2009 to 2011 is likely to be significantly above the peak levels experienced during the height of the last major recession in 1992," says the company.
What's not to like?
The devil, as always, is in the detail -- and the detail, in this case, consists of the company's tax and corporate finance activities, as well as some now-abandoned ventures into consumer debt management and customer relationship management consulting.
Last year, for example, wasn't a good year to be in corporate finance, as the credit squeeze brought activity in the market to a virtual standstill. Restructuring and headcount reductions followed.
"The market for corporate finance services remains extremely challenging, primarily due to the restricted funding available for transactions," says Begbies. "The resource base is sustainable in the current marketplace, but any recovery to a profitable trading position is reliant on an improvement in the economic environment and a recovery of transactional activity." Translation: the corporate finance arm is losing money.
Tax advice, too, has hit the buffers. "The group's tax practice is currently impacted by a reduced demand for higher-margin transactional support activities," says Begbies, adding that the resource base will be watched closely over the coming months. Translation: don't bother sending us a CV.
Is it a buy?
Today, Begbies is trading at 100p, well down from the 202p seen last August. Even so, it's yielding just 2.8%, despite management growing the dividend fivefold in as many years.
And if you're a watcher of investment guru Jim Slater's PEG ratio, then the PEG of 0.5 certainly indicates an opportunity to buy growth at a potentially attractive price. A glance at the figures, however, shows that although Begbies has been growing, the growth has been erratic, rather than steady.
I'm not too bothered about that, though. While the yield is nothing to get excited about, publicly-quoted businesses like Begbies are comparative rarities, and the share price should have a fair bit of upside. If an insolvency practitioner was trading at over 200p in the good times, it ought to do better than 100p when experiencing high levels of demand in a recession. While the other divisions aren't doing well, the majority of Begbies' people, after all, work in its insolvency arm.
Yet the fact remains that only one of the engines of Begbies' growth is firing on all cylinders -- the insolvency practice -- with the remainder coughing out a mixture of red ink and surplus people. If Begbies can sort out the problem areas before economic recovery brings an end to the insolvency boom, there'll be a chance to buy a quoted business advisor at a decent price. If it can't, then lean times loom.
In short, then, one for the watch list -- or the brave.
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