This insolvency group is struggling to make money from the recession.
Corporate insolvency practitioner Begbies Traynor (LSE: BEG) has caught the eye of a few readers of our discussion boards recently, for reasons it's not difficult to discern. As I pointed out last July, if an insolvency practitioner can't make boatloads of money in the worst recession since the 1920s, who can?
Not Begbies Traynor, it seems -- as the company's half-yearly results, announced today, made all too clear. The problem? Not the insolvency business, ironically, but difficulties in other parts of the business.
As I noted last July, "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."
And today, one of those cylinders was the cause of a profits warning -- despite a booming insolvency market.
Or, as the company put it: "The level of potential growth in insolvency for the year is now not expected to offset fully the weaker than anticipated performance of the tax practice. Accordingly, the board anticipates results for the year as a whole will be slightly below current consensus market expectations."
At the time of writing, the shares are down 11%.
Busy, and growing
The core results weren't too bad:
- revenues up 21% to £34.2 million;
- EBITA up 13% to £4.6 million;
- adjusted profit before tax up 32% to £4.3 million (69% before adjustment);
- adjusted EPS up 22%; and
- interim dividend up by 9%.
Furthermore, management spoke of "historically high levels of activity" in its insolvency practice, continued expansion, a joint venture with an American financial advisory consultant, and improved results from its corporate finance team.
All good stuff. And based on previous downturns, the company expects insolvency work to increase still further -- especially as the government takes steps to ease back on measures to help stimulate the economy.
Businesses treading water today, in other words, will sink below the surface as interest rate rises and tax deferrals take their toll.
Losses, debt and cash flow. Yawn!
The devil, though, is in the detail -- and some of those details are by now becoming wearingly familiar.
- The revenues earned by the company's second largest division, tax advice, are still declining, and it is still loss-making, even after slashing headcount by 7%.
- At £16 million, borrowings are still high, even if they are "comfortably within the group's existing banking facilities" of £25 million. Put another way, borrowings are roughly equal to three month's revenues -- with the headroom breached if clients were to be six weeks late in paying their bills.
- While net cash flow is once again positive, at £1.3 million it's still pitifully little. Put another way, cash flow in is less than dividends out.
Is it a buy?
Back in July, I rated Begbies as "one for the watch list -- or the brave." Since then, its share price stayed fairly flat before today's plunge -- substantially missing out, in other words, the general upwards market movement since July.
Worse, while the rest of the market has soared since the lows of March 2009, Begbies' share price has sunk 22% -- which has to be some kind of record. Especially for an insolvency business.
So is it now a cheap stock? Have the company's present local little difficulties propelled its share price into bargain territory?
By my reckoning, even at today's price, it's still trading on a P/E of around 12. Better times for this £95 million market-capitalised business will doubtless come. But in the meantime, I can think of plenty of other shares I'd sooner buy.
More from Malcolm Wheatley:
