Wed 12 Dec - Begbies Traynor interims

Begbies Traynor (BEG) is a favourite value share of mine, and I reported on it originally here in early July. At the outset, in the interests of full disclosure, I hold shares in this company.

Today I went along for their interim results presentation, given by the CEO and 29.5% shareholder, Ric Traynor, and FD Nick Taylor. Begbies website is here.
They are the market leader insolvency practitioners for small to medium corporate insolvencies, and have 7% of the overall insolvency market. They are the only pure play insolvency practitioners Listed in the UK, most competitors are partnerships, operating much like firms of lawyers, with the international Big 4 dominating the larger corporate insolvency market (Price Waterhouse Coopers (the firm I trained with), KPMG, Deloittes, and Ernst & Young).

You might expect the insolvency market to be buoyant, but it isn't - because Banks and HMRC are under political pressure to keep unemployment down, hence with low interest rates, many "zombie" companies are continuing to trade, whereas in previous Recessions they would have been put into Administration.

So the point is that, at some point, Begbies are likely to see a long-term surge in business once the zombie companies are eventually broken up. The trade body called R3, estimates that there are 160,000 UK zombie companies, so this is a big issue.

Interims today were pretty soft - turnover down just over 10% to £26.1m for the 6 months, but continued staff reductions mean that adjusted profit before tax was £3.2m (cf. £4.1m last year H1). H2 is the seasonally stronger period, so it looks to me as if full year EPS is likely to come in around 5-6p.

Bear in mind that the shares are only 32p, and you can see that they look cheap, on a current year PER in the 5-6 range.

Dividends are a key attraction here - the interim divi is maintained at 0.6p, and when I asked them about sustainability of divis, mgt were emphatic that it is their intention to maintain the current progressive dividend policy, so that should mean about 2.2p for the full year, giving a cracking yield around 7%!

Debt is not a problem, as it's unsecured, and is expected to be renewed in 2014. Note that net debt has reduced substantially from £27.3m this time last year, to £18.3m this year. Bear in mind that with the very long debtor book inherent with this type of insolvency work, the debt is required to support the >£40m debtor book of unpaid work in progress. So it's revolving debtor financing, not structural debt used for acquisitions. Key difference.

Whilst the insolvency market remains tough, and competitive, there are 2 interesting reasons to be cheerful.
Firstly, management are back on the acquisition trail. They say price expectations have moderated to a PER of 5-6, and that less is expected up-front, so earn-outs for more than half the price are now possible. So expect growth through small, reasonably priced acquisitions from 2013 onwards.

Secondly, Begbies believe that the market is now so competitive that the Big 4 are not making their required returns from small to medium insolvency work, and dislike the reputational impact which is inevitable with this work (there is always someone aggrieved). So long-term, it is possible that the Big 4 may even withdraw from the smaller end of the market, leaving the field to Begbies.

So overall my view is pretty sanguine about Begbies. Yes their market is tough at the moment, but there are reasons to expect a stronger outlook long term. Given that they are only on a PER of 5-6 in tough times, then the shares could end up looking amazingly cheap in a few years' time with some growth under their belts. Meanwhile we are paid 7% p.a. in divis to be patient.

I asked about the Caledonian overhang. Mgt said it will take time to clear, but they are not sellers at any price. Of course today's overhang is tomorrow's surge. And it allows people who want cheap stock to buy in size without chasing the price up, much like Vianet. Hence for patient investors like me, it's an opportunity not a problem, indeed I bought some more BEG this morning.

Their outlook statement says the full year (to 30 April 2013) should be broadly in line with last year, and the impression given is that no further significant softening of the market is likely, but also no big upside in the short term either.

A lot more detail was covered in the meeting, but these are the salient points as I see them. To me, this seems a well-managed business, making decent margins in a tough market, with the upside in for free, and a great, sustainable divi whilst we wait.

As usual, this is NOT any kind of recommendation, but is merely my personal opinion for general interest. As always, please do your own research, take professional advice, etc.