Thursday, July 5, 2012
Begbies Traynor (BEG) results (5 July 2012)
Voluntary disclosure: my family hold a small amount of shares in this company.
I went along to the analysts meeting this morning for Begbies Traynor (BEG), the only Listed pure play insolvency practitioners. This is a specialist & highly regulated area of accountancy, with high barriers to entry (the qualification is very difficult indeed to obtain). Today's meeting gave me the opportunity to meet the Executive Chairman (and 29.7% shareholder, Ric Traynor), and the FD Nick Taylor - both of whom impressed me as being down to earth and focussed on delivering shareholder value.
I know a bit about this sector, as when I did my chartered accountancy training with Price Waterhouse in the recession of the early 90's, they transferred me from audit into insolvency, and I helped in the Receivership of a Rolls-Royce dealership, a hotel, and a leisure group. It's difficult & delicate work (I still remember an angry ex-employee bursting into the premises & threatening me, and another time when all the locals came into the hotel bar to take the mickey out of me doing a stock-count, suggesting I needed to count all the matches in the matchboxes, to general hilarity).
Also I've been on the other side, buying a business from the Administrators about 10 years ago, who happened to be Begbies Traynor!
They are well known, and the market leader of small to medium insolvency jobs. Their main competitors are the big 4 accountancy firms.
I would describe the results as reasonably resilient, with turnover slightly down at £57.7m, and adjusted profit before tax of £7.4m (prior year £8.1m). That translates to adjusted EPS of 6.0p (prior year 6.4p).
At 30p the shares are therefore on an adjusted PER of just 5.
The market cap is £27m (with 90m shares in issue).
The dividend has been maintained at 2.2p for the year, although the phasing has been changed to reflect the seasonality of the business. This gives a very attractive dividend yield of 7.3%.
So why are these shares on such a low PER of just 5? Several reasons perhaps, as follows.
Firstly, the business has had several problem divisions (such as its tax practice, its loss-making Red Flag business, and some small but problematic overseas operations). Therefore the valuation probably reflects some discount for what the Chairman referred to as the "sins of the past". But the point is that these problems have now been solved, with disposals. So it's now a nice clean focussed business.
Secondly, the market perhaps aligns Begbies with problem firms of accountants like the bust Vantis, and the almost bust RSM Tenon. Both took on far too much debt, and got into problems (amazingly, as surely accountants are supposed to be experts in finance?!).
Begbies does have significant debt, but I will explain why it's not a problem. Net debt fell to £20.1m, down from £22.5m a year ago, and well down from £27.3m 6 months ago, helped by profits and a sale & leaseback of 160 company cars.
This is well within banking facilities.
So why am I relaxed about debt? It's because of the nature of the business. Insolvency practitioners always require bank financing to run the Administrations, and they are then eventually paid from asset disposals once the fees are approved at a creditor meeting (usually led by the bank).
Hence they run a large, long debtor book (8.5 months long in Begbies case, at £43.8m), which is part-funded by £20.1m in net bank debt. The two items need to be seen together, and the normal course of business.
I asked about the banking relationships, and management confirmed they are very solid. The facilities are provided jointly by HSBC and Yorkshire Bank, and are unsecured - very important in showing how comfortable the banks are.
We were told there is no pressure to reduce the borrowings, and there is plenty of headroom.
So once you understand that the debt is simply a revolving facility to finance the long debtor book, which is normal for insolvency practitioners, then it suddenly ceases to be a problem. This message has not got across to the investment community - yet. This in my view is one factor which could trigger a re-rating, once the market learns to become more comfortable with the nature of this debt.
Thirdly, the dividend yield is now looking comfortably sustainable, hence there is scope in my view for the dividend yield to come down from 7.3% to perhaps 4-5%, which implies the shares could be around 50% higher in time. And until then, it's rather pleasant to keep receiving the dividends!
The other significant factor which could trigger a re-rating of these shares is the nature of the insolvency market. We were shown an interesting slide which charted the number of insolvencies over the last 40 years. As you would expect, this showed a spike in insolvencies both during Recessions, but also a further significant increase after Recessions (as creditors - mainly banks - push for asset disposals in a recovering economy).
But this time around things have been different. Unprecedentedly low interest rates, and political pressure, mean that insolvencies have been artificially low in this cycle. HMRC have been exceptionally lenient in allowing more time for financially distressed companies to pay, and hence this has kept alive many "zombie" companies which are essentially bust, but still operating on life support.
Clearly this will not last forever. At some point the Recession will either get worse, in which case insolvencies will rise, or the economy will begin improving and zombie companies put out of their misery by Banks cleaning up their balance sheets. But at the moment Banks don't want to make any provisions that they don't have to.
So the interesting thing is that either way Begbies should benefit. So not only are the shares cheap (in my opinion) based on current trading, but there are good reasons to expect better trading in the future whatever path the economy takes.
Begbies have nothing exciting planned - probably more small, bolt-on acquisitions (which are now reasonably priced), which is all I want them to do. It's now a focussed specialist, sticking to its knitting - ideal from an investor point of view.
There are no regulatory or legal issues on the horizon which worry management. Govt is not going to change the law on pre-packs, which was one recent issue.
So as a boring, sound business, paying a smashing dividend yield of 7.3%, with good upside for a re-rating at some point, I like these shares, like the management, and consider this a long-term hold for me.
As usual please do your own research, this is personal opinion only, and nothing here should be misconstrued as being advice, which it is not.