Shares in FRP Advisory Group (LSE: FRP) could do well in the coming recession. FRP is one of the largest restructuring advisory firms in the UK. Businesses appoint FRP to help them with insolvency proceedings or help avoid them. FRP also helps companies raise and refinance debt.
Unfortunately, the coronavirus crisis has pushed many companies close, some all the way, to bankruptcy. FRP has seen increased demands for its services as a result. Just last month FRP was appointed as administrators to Debenhams, a department store, and Carluccio’s, a chain of restaurants.
Doing well in a crisis
During March and April, FRP generated revenues of £11.5m. To put that in perspective, £11.5m is 20% of the entire 2019 financial year revenues. FRP’s revenues for the 2020 fiscal year, which ended 30 April, are expected to be £63.2m, which would beat last years £54.3m by over 16%. Despite working from home, FRP staff have been busy, and no doubt happy to have not been furloughed. With operations continuing and experiencing increased demand, and FRP’s strong balance sheet, the final dividend has been maintained.
FRP’s impressive investment case has not gone unnoticed. FRP listed on AIM on 6 March 2020. At the time of its IPO (which generated a balance sheet bolstering £20m), FRP had a market cap of £190m on a share price of 80p. Investors have since driven FRP’s share price to over 120p, and its market cap has risen to £288.6m.
Is it too late for investors to get on board now? Well, a recession is coming, and there could be a second outbreak of the coronavirus. As it stands, it would be foolish to rule out further periods of increased demand for FRP’s services. Because firms like FRP are dealing with around four times as many cases as usual, and they are increasingly complicated, there is also a decent-sized, and lucrative backlog to work through.
Of course, no investment is without risk. Only 40% of FRP shares are in public hands. Potentially, FRP shares could be volatile and challenging to sell in a hurry. There is also the fact that in good times, insolvencies will dry up. As such FRP is potentially a counter-cyclical stock, meaning it will do well when markets sour, but poorly when they are buoyant.
Recession investment
However, although the absolute number of bankruptcies may fall, FRP can still win by gaining market share in its bread and butter business of restructuring. It can also grow and expand the range of services it offers. FRP grew its revenues from £17.4m in 2011 to £54.3m in 2019. Over the same period, it increased the number of partners (these are the people who lead the cases FRP takes on) from 29 to 50. Revenue per partner increased from £0.6m in 2011 to £1.09m.
This growth in size and efficiency was in part made with four acquisitions, which added nine partners, but the rest was organic growth. The £20m raised in the March IPO is free to be used to further expand FRP’s size, presence, and range. In recent years FRP has beaten off competition to be appointed as administrators in the high profile liquidations of BHS, Bonmarché, and Patisserie Valerie. I am willing to bet FRP can continue to expand, and an investment in its stock will do well in a recession and beyond.
