It wasn’t a shock to see Begbies Traynor Group’s (LSE: BEG) share price explode in 2019. Demand for such corporate insolvency specialists balloons in times of economic stress. So it’s no coincidence that the stock gained 47% in value as the UK economy hit the skids.
If latest official data is anything to go by then trading should remain strong at Begbies Traynor too. In November, the economy shrank 0.3% month-on-month, according to the Office for National Statistics. On an annual basis, it grew just 0.6%, the worst result for seven years.
SOS!
The latest Red Flag Alert report from the company underlined how tough things are for British business right now.
It said there are currently a shocking 494,000 companies in what it terms “significant financial distress”. This is the highest number on record. It’s also up 81% since the start of 2016.
“Ongoing uncertainty around Brexit” drove the number of distressed firms to record levels, Julie Palmer, partner at Begbies Traynor, said. But cheerily she suggested that with “political certainty and a clear Brexit path,” business should be better equipped to plan in 2020.
Conditions to remain tough
UK commerce shouldn’t break out the bunting just yet, though. While visibility around the Brexit issue might be better, there are a number of other issues businesses have to battle this year and beyond.
As executive chairman at Bebgies Traynor, Ric Traynor, noted: “The world faces a new set of economic challenges compared to 2016. Economic and business protectionism continues to spread, and the euro block economy is faltering. This, combined with a move towards carbon neutrality and the structural and economic changes affecting UK businesses, means that the challenges ahead are likely to be considerable.”
Besides, as I’ve argued before, don’t expect Brexit-related tension to have gone away completely. It has merely taken a breather following December’s general election and the subsequent guarantee that Britain will exit the European Union at the end of January.
However, with tense trade negotiations about to begin and very little time to resolve them, nerves could be set jangling again before long. Talks will officially start between London and Brussels on March 3, and the UK will leave the economic block without a deal unless they are resolved by December 31 .
Sales are soaring
Business at Begbies Traynor has certainly boomed in recent times. Revenue jumped 21% in the six months to October, to £33.8m, while pre-tax profit leapt 280% to £1.9m.
And the Manchester company is investing heavily to capitalise on these favourable short-term trends and to lay the foundations for long-term growth (it raised £7.8m last year via a share placing to continue on the acquisition trail).
No wonder City analysts expect annual earnings to keep growing by double-digit percentages. Rises of 18% and 17% are forecast for the fiscal years ending April 2020 and 2021 respectively. And at current prices, these estimates make Begbies Traynor a top value pick too. It currently trades on a rock-bottom forward P/E ratio of 14.3 times.
Despite recent price gains, this is a share that looks grossly undervalued to me. I’d happily buy it for my ISA today.
