Theresa May’s Commons statement on Brexit yesterday raised as many questions as it answered. Many commentators are speculating about the impact that the monumental decision to leave the EU could have on our economy and on our stock markets once more, but the truth is that the butterfly effect of the event is impossible to predict.
If you’re feeling nervous about Brexit’s impact, then perhaps Begbies Traynor (LSE: BEG), the UK’s leading corporate rescue and recovery practice, could be an interesting counter-cyclical stock to add to your portfolio.
Founded in 1989, the company has longstanding relationships with banks and businesses alike and stands to profit from the misfortune of other companies. If our economy struggles after Brexit, there’s a good chance that Begbies will profit from managing insolvent firms.
Here comes the crash
Given its reliance on faltering operations, Begbies keeps a close eye on the state of the economy and releases a quarterly ‘Red Flag’ to share its findings. On 1 November, the company said: “Nearly half a million businesses across the UK are in a state of ‘Significant’ financial distress, even before the effects of a potential interest rate hike are felt.”
It argued that low interest rates and a flexible labour environment had acted as life support for thousands of “zombie companies,” or organisations that are ambling onwards, barely profitable, heavily indebted and narrowly surviving.
The company predicted that a hike to the minimum wage combined with rising interest rates could finish off these struggling organisations. Julie Palmer, partner at Begbies Traynor, even described consumer credit as being in bubble territory.
I’m not sure I agree with this rather glum view of the UK economy, but if these statements are accurate, perhaps it could be due to a glut of business. Considering that Begbies has used the low-interest rate environment to snap up other corporate rescue firms at bargain prices, its performance in a downturn could be impressive.
Booming business
For now though, business is looking solid enough. First-half results released today showed revenues up 6.4% to £26m and underlying profit before tax up 16% to £2.9m. The interim dividend was increased 17% to 0.7p and if the final payout is increased concurrently, the shares today could offer a yield of 3.8%.
The outlook for the full year is promising and analysts expect the company to achieve a £4m profit. This leaves the shares on a forward P/E of 18, so it seems the market could already be pricing-in a slight uptick in profits.
I’d consider buying into the company if it weren’t for its decision to diversify into property services over the last few years. It is now in the business of auctioning and managing properties and advising clients on leases, valuation and rent rates. It is possible a slowdown in property could take the edge off the rising fortunes of the insolvency business.
Building a solid understanding of the relationships between these two business units is essential if you are considering an investment in Begbies, but given the attractive dividend yield and rising interest rates, I believe the company could be worth a closer look.
