Begbies Traynor (BEG) - Growth and an insurance policy wrapped up into one
Is this the mythical "heads I win, tails you lose" share?
Current holding - first bought in Dec20 for 90.5p. Topped up at the start of Apr24 at 108p. Current price of 107p.
I’ve chosen to write about Begbies Traynor this week, because after more than 3 years of holding it, and never topped up or sold, I’ve decided to increase my holdings here with a top-up.
When I bought in Dec20 it was my largest holdings, but over the three years as my portfolio grew in base capital (ISA and SIPP contributions) as well as gains (+49%), it started to slip down in size, to 6th largest. I realised that I do quite like Begbies Traynor to be one of my largest holdings, so with this top-up it is now my fourth largest holding.
It has been a share that has happily delivered against my initial investment hypothesis in terms of action, but also frustrated in not fulfilling its full potential in terms of earnings and share price re-rating.
Below, I lay out why I am still invested here, why I have topped up recently, but also what I’m looking to see in the next 6-12 months to keep the faith.
A brief summary of what they do
There are two main parts to Begbies Traynor. The first is the insolvency practice, under the Begbies Traynor name. It is a firm of professionals that get involved when companies get into trouble. Either restructuring (before insolvency proceedings) or being formally appointed to administer an insolvency process. Their niche in this insolvency market is small and mid tier companies.
The second part is the real estate business, which itself is a collection of three capabilities. A firm of chartered surveyors - mostly valuations, planning, and other surveyor type work for commercial properties. A commercial property auction business line. And a finance brokering business. There is a portfolio of brands are in this stable of real estate businesses.
Heads I win….
The strategy that Begbies Traynor has been pursuing has been growth by acquisition. They believe that the market for both insolvency and real estate services is fragmented, and there is an opportunity to build and consolidate a market leading position. In the insolvency space, they are already a leader in the UK by volume of work (but not value) but the industry is still very fragmented.
In the past few years, they have done many, many acquisitions. In the latest half year to Oct23, they continued and did three small ones. Most of their recent acquisitions are small - in the low millions total consideration, so relatively low risk compared to their market cap of £170m. However, they did do some bigger ones back in 2021 in the £10-£20m range to expand their real estate and financing capabilities.
They believe they can buy small businesses at good valuations, at attractive price to EBITDA ratios, funded from existing cash or debt facilities (instead of raising new equity), and therefore enhance EPS that way. In addition, there is some operational efficiency that can be squeezed out, enhancing profits. There is some element of increasing capabilities - acquiring businesses with complementary services and geographies to what is offered existing - but management never seem to really play up this benefit so I have to assume that cross-sell of services or creating a greater platform isn’t their main goal here.
So far, it seems like all their acquisitions have performed well. Management, having done many over the last few years, are now a seasoned bunch in acquiring and integrating.
But have they been successful “buying in” earnings accretive growth? The verdict is still out, at least for me. Sure, revenues have gone up from £37.5m in H1-FY21 to £65.9m in H1-FY24. However, adjusted PBT has only increased from £8.0m to £9.9m; not very transformative. And looking at PBT on a statutory basis, which includes the huge amounts of acquisition deferred consideration still being paid out, makes for painful reading.
However, we might start to see a clearer picture emerge in the H2-FY24 results (to Apr24) and the next H1-FY25 results, as I expect the deferred consideration costs start to fade away. I haven’t been able to find an exact breakdown of the deferred consideration still to pay out in the years ahead in the HY results, so if anyone sees it, let me know in the comments below.
Currently, brokers have c10p adj EPS pencilled in for FY24, similar to the 10.5p for FY23. If one is happy to accept this adjusted EPS for the purposes of a baseline for future years (when deferred consideration costs go to zero), then the valuation seems attractive at around 11x PE, with the possibility of growth above this baseline if insolvencies and corporate stress increases in the next 1-3 years.
… Tails you lose
As part of their FY Dec22 results, Begbies boldly stated that “80% of [their] income [is] from counter-cyclical and defensive activities”. So clearly, if there’s one company that should be the poster child for the “bad news is good news” flavour of the day, it is Begbies Traynor. This is part of the reason why I got interested in Begbies Traynor at the end of 2020, to add something in my portfolio that was defensive, given the COVID uncertainty in the world around that time, as well as conviction that “bad news” - aka more companies going bust - was inevitable. However, government largess through COVID loans has largely kept many small and mid sized “zombie” firms alive. Until now. But these companies usually never return back to the living - and the inevitable death (ie insolvency) needs to happen.
So far in 2023, the rise in insolvencies has been modest in the UK. In February 2024, Compulsory Liquidations were up +35% YoY, and for Administrations it was up about +54% YoY. Both these numbers seem like good growth rates, but the monthly numbers can be volatile, and previous months (Jan, Dec) were lower growth rates; so the verdict is still out whether this is a start of a trend or just a one-off blip. However, all signals - from insolvency appointments to Begbies’ own Red Flag report, have shown a gathering momentum of company stress. Due to a combination of the high interest rates, inflationary pressures, anaemic growth, and the exhaustion of COVID stimulus.
On top of that, we all know about the looming storm clouds on the horizon for commercial real estate. There will be a boom in activity in terms of surveyor work (valuations, replanning to other use types, as well as more properties and plant going to auction in forced liquidation). In addition, financial brokering expertise will be needed for hardcore surgery on loans. All of this, covered by the portfolio of real estate services in the Begbies stable.
So in some ways, Begbies might be the ultimate “negative beta” share to hedge a long-only portfolio. In times of economic stress, while other share prices will generally drop, Begbies should maintain or even increase, with the expectation of financial destress leading to more work for Begbies.
Why I’m invested
Having laid out the two outcomes above, it feels like owning Begbies covers a few bases in terms of two plausible scenarios in the next 1-2 years.
In a benign economic scenario, the “soft landing” that everyone is obsessed about, where there are no major shocks and the UK economy muddles along… we should see Begbies drive incremental EPS from the c10p baseline. They won’t blow the lights out, but at a 11x PE valuation one can live with modest growth. This is the “heads” scenario described above.
In an economic shock/recession, we should see Begbies business boom, both in the insolvency and the real estate side of the business. It is, after all, 80% defensive/counter-cyclical in their own words. The share price will do very well as earnings expectations get upgraded, and it would be a very good hedge for the rest of the long-only Boon Fund. This is the “tails” scenario.
There is a chance that they got some of the acquisitions wrong, and we start to see a decline in revenues. Either due to key talent leaving and taking business with them (after all this is a people business), or competitors eating their market share. EPS will decline, PE multiples will too. In my opinion, there is a risk of a 10-30% share price decline in this scenario. However, it is unlikely to fall further, as they haven’t levered themselves up to make the acquisitions, sitting on a net cash position as of Oct23 and being cash generative. This scenario seems unlikely, as management have been doing bolt-on acquisitions for years (as early as 2019, maybe even before then) and not had any major mishap.
Where could the share price go in the next 12 months? I’m expecting that a FY Apr24 results of c10p EPS, and a confident outlook, based on rising insolvency trends, could see this re-rate back to the 150p range. It has touched that price in the past 18 months, and the “heads” investment thesis hasn’t changed since then (and in fact would be stronger, now that the large 2021 acquisitions have bedded in and the deferred consideration outflow is ebbing). If the “tails” scenario start to play out later in the year, all bets are off. This could fly past 200p and offer a good offset to losses in the rest of the Boon Fund.
Thank you for the post. I considered Begbies as an option to play this thesis, however it is not as attractive as Manolete for the following reasons:
1. Their historical average margins are way lower than Manolete´s as I show below:
Manolete margins: (including the terrible years after the insolvency ban)
Gross margins have averaged 57%
Operating margins have averaged 23%
Net margins have averaged 16%
Begpies margins:
Gross margins have averaged 46%
Operating margins have averaged 12%
Net margins have averaged 5%
2. PE ratio: (LTM)
Manolete: 28
Begpies: 434
Im not interested in a business with much lower margins and a more expensive valuation.
Hope this helps you and your subscribers.