Begbies Traynor: No chinks in the Armour.

Pretty hard to say anything even remotely negative about Begbies Traynor, the corporate insolvency services company. Since listing on AIM in October 2004 the shares have had a healthy appreciation and the company has continually hit consensus broker targets. It has avoided any nasty errors in its path to organically and acquisitively grow the business into the UK?s largest independent specialist insolvency company.

Looking at the volatility in the share price, one would think that perhaps there were some concerns over the company?s prospects. Nothing could be further from the truth. Instead the diagnosis is far more mundane ? the management hold too much stock! Not very often that management can be blamed for owning to much of the company they run, but in Begbies case the three executive directors still retain a mind boggling 58% of the issued capital. Fifty eight per cent % of a £113 million company is pretty good position to be in, but if you think the company is complacent about driving growth, think again.

Corporate insolvency may sound a bit boring, but Begbies has a wide range of products that it offers, which have been built around the core corporate insolvency business. A good example is Begbies move into business investigations ? i.e. hunting down money or people who have gone ?walkies? with cash which is owed to creditors of the failed business. As Begbies is dealing with the insolvency in the first instance, it makes logical sense that it offers these additional services as the potential to grow revenues through cross marketing is enticing.

This potential is even more pronounced when one looks at the macro level of insolvency rates of business in the UK ? flat as a pancake for the last decade. Despite this, Begbies has increased market share in the Small and Medium Enterprise (SME) insolvency sector and hasexpanded into Corporate Finance Advice, Debt Solutions (including IVA?s) and Business Solutions.

In addition to these areas, a change in law society rules next year will allow for the ownership of law firms from outside the legal sector. As Begbies currently outsource a large amount of work to law firms, it is very conceivable that when the rules change, the company will seek to capitalise on the potential by moving outsourced work in house.

~A combination of organic growth, cross selling products and bolt on deals has allowed growth to accelerate as the company has widened the breadth of business solutions in the SME sector by focusing on selling additional services built around the core corporate insolvency business.

Internal targets set by the group forecast a rise year in revenues from £22 million in 2004 to £41 million this year, on to £65 million by end of 2007 and £110 million by 2010. Operating margins for the business are pretty steady ranging between 19-23%, mostly fluctuating due to the effect of acquisitions running on slightly different operating models [no ? our margins have been improving as we spread fixed costs over a wider acrtivity base]?as such the 2010 forecast includes an ambition to maintain margins above 20%.

Its broker, Shore Capital forecasts earnings per share in 2007 and 2008 of 7.8p and 9p respectively which puts Begbies on a forward multiple of 19.5 falling to 17 in 2008. Pretty fair valuation we hear you say, but broker forecasts don?t include earnings enhancing acquisitions ? even though they would have a positive effect on earnings per share?something to chew over?

The one area that Begbies does expect some margin pressure is in the Individual Voluntary Arrangement (?IVA?) business, which currently only represents 5% of turnover. As a niche sector that?s seen an explosion of companies looking to benefit from the apparent ease in in the UK with which individuals can wipe out their debt, the market is starting to look overcrowded and a shake up is on the horizon. Also on the horizon is a big black cloud ? creditors. Large banks are starting to show agitation with the number of IVAs, and how independent IVA companies are marketing them. It looks likely that there could be a major face off between creditors and IVA companies which is bad news for the sector. Fortunately Begbies has limited exposure, and already has very strong working relationships with large financial institutions. It considers itself a responsible personal insolvency advisor that offers a wide range of solutions to indebted clients rather than simply pushing the IVA route.

One area that Begbies does see potential for serious growth with little competition is through its newly launched Begbies Global Network which is looking to from alliances or working relationships with similar-sized insolvency specialists in other parts of the world. In some cases, it may even involve Begbies investing in its partners to help them develop their own services. The big plan here is about capturing more work. By joining up with similar sized companies in other regions, Begbies can once again cross market products through the network where a more global corporate insolvency capability would be required.

Begbies shares have come off the boil in the last six months and appear to be consolidating around the 160p mark. Considering the impressive track record to date, and continued strong, yet sound growth trajectory of the business, it would be hard to argue why the shares shouldn?t trade at a premium.