Investors’ Chronicle: Begbies Traynor, Trifast, Loungers

BUY: Begbies Traynor (BEG)

Expect increased work volumes with corporate insolvencies on the rise, writes Mark Robinson.

The government recently reported that insolvencies in England and Wales increased by 40 per cent year on year through May. An increase of that magnitude is unlikely to be a statistical blip, and it may be that the full impact of a year and a half of rising interest rates is only just becoming apparent.

Wherever we are in terms of the business cycle, conditions have certainly improved for insolvency practitioners and specialist financial advisory firms.

Begbies Traynor provides a case in point. The group’s business offering provides a degree of counter-cyclical protection for investors, but its range of services has expanded appreciably over time. Indeed, from “a standing start in 2014”, revenues from non-insolvency work now constitute 40 per cent of the group total and are supported by healthy rates of recurring revenue strands. Overall revenue growth of 11 per cent was split between organic and acquired sources and the group continues to broaden its geographical footprint.

Adjusted operating profit increased by 17 per cent to £21.8mn, aided by a one percentage point increase in the underlying margin to 17.9 per cent, a reflection of the “continuing increase in [Begbies’] scale and service offerings”.

In July 2022, the group acquired Mantra Capital, a London-based property finance brokerage, to complement an earlier deal to acquire the MAF Finance Group. In addition, Begbies added three chartered surveyors’ practices to its roster in the period under review, enhancing its reach in eastern England and Yorkshire in the process.

Despite the buying spree, the net cash outflow from investing activities was broadly in line with the previous year due to £1.16mn in net cash acquired as part of the deals, set against £10.6mn of acquisition and deferred consideration payments. The group generated free cash flow of £14.1mn, while dividend payments were up by 17 per cent.

Equity Development gives a forecast adjusted earnings per share of 10.3p a share, against 10.5p in full-year 2023 due to “tax rates and issuance” considerations, while keeping its target price at 175p.

Ric Traynor, group executive chairman, pointed out that “between 2019 and 2023, [the group] has doubled revenue and tripled adjusted profit before tax, from a combination of organic growth and acquisitions”.

Revenue from formal insolvency appointments also doubled over that timeframe and we might realistically expect further increases in work volumes over the coming months, though whether this will result in increased market share is difficult to gauge. Nevertheless, we feel an adjusted forward rating of 13 times is not overly demanding given the consistent dividend growth and counter-cyclical benefits on offer.

SELL: Trifast (TRI)

The maker and distributor of fasteners needs a firmer grip on costs, writes Michael Fahy.

Industrial fastenings specialist Trifast has had a “very challenging” 12 months. Just as its shares looked like they were recovering from an awful 2022, they plunged by a third on a single day in February after it announced a profit warning that also saw longstanding chief executive Mark Belton fall on his sword.

Revenue for the year grew by 9 per cent, but was the only metric heading in the right direction. On an underlying basis, operating profit fell by almost a quarter at constant exchange rates to £11.2mn as there was a lag in passing through costs.

Once a range of exceptional items were accounted for, including £4mn of restructuring costs, £3mn of impairments, £1mn in payouts for “loss of office” and a further £1.7mn in implementation costs for a long-running IT project, the company declared a pre-tax loss of £2.7mn. A review of costs has identified savings of over £5mn that can be made, the company said. 

Working capital also remained elevated, at 46 per cent of total revenue, and net debt rose by £15.8mn to £53.8mn by the year-end, or 2.2 times underlying cash profit.

Bringing down both are part of the company’s immediate priorities, interim chief executive Scott Mac Meekin said. He expects an improved performance in its current financial year, albeit weighted towards the second half.

Trifast’s shares trade at around 11-times house broker Peel Hunt’s forecast earnings of 6.7p a share, which is below their five-year average. Yet even if it does bring down overheads, weaker end markets mean a recovery in profitability is far from guaranteed. We think Trifast needs a firmer fix on its own finances before we change our sell recommendation.

HOLD: Loungers (LGRS)

Reasonable prices could help Loungers stand out above struggling high-street restaurant chains, writes Jennifer Johnson.

Unlike many industry peers, the management team at hospitality group Loungers is optimistic about the future. “Just because a number of over-leveraged casual dining brands have failed over the last few years doesn’t mean that casual dining is totally broken,” chair Alex Reilley said in a statement.

The company’s own results appear to confirm that there’s some momentum in the sector — despite a multitude of post-pandemic challenges. Loungers, which operates through the Lounge and Cosy Club brands, achieved its highest-ever revenue and opened a record 29 new sites. 

In its full-year results, management also highlighted the fact that Loungers’ adjusted Ebitda figure (£47.3mn) has grown 66 per cent since its 2019 IPO. However, its adjusted Ebitda margins were 140 basis points below what they were four years ago due to labour and cost headwinds. 

According to broker Peel Hunt, the company is hoping to restore its pre-Covid margins in the medium term via “new purchasing contracts, ongoing operational efficiencies and scale economies as the estate expands”. Price increases and supplier renegotiations helped Loungers to slightly increase its food and drink margin in the period.

Fellow hospitality group JD Wetherspoon recently reported growing sales as consumers seek out more affordable food and drink options. With its stated commitment to “core value for money principles”, Loungers could also prove to be a beneficiary of this trend.

FactSet broker consensus puts its forward price-to-earnings multiple at 22.2 times for the current financial year, which strikes us as slightly steep. We’d like to see stronger evidence of margin improvement before we’re fully convinced.