Investors’ Chronicle: Begbies Traynor, Victoria, AudioBoom

BUY: Begbies Traynor (BEG)

The business recovery group is poised to benefit from increased distress in corporate UK, writes Mark Robinson.

Begbies Traynor drove revenues by nearly a third through full-year 2022, but a combination of one-off costs and accounting items sent earnings into negative territory. The business recovery and financial advisory group has been in an acquisitive mood over the past 15 months and a succession of deals has had a profound impact on full-year figures.

The group added CVR Global and David Rubin & Partners to its stable late in its previous financial year, while finance broker MAF Finance Group was acquired in the period under review. The acquisitions have enhanced and broadened the commercial offering within the business recovery and property services segments. The deals have fed through to an increase in market share by volume.

M&A activity has certainly contributed to impressive top line and free cash flow growth, though the former measure grew by a healthy 7 per cent on an organic basis. Improved cash generation resulted in a net balance of £4.7mn against £3mn in the previous year and was achieved despite £8.2mn in acquisition and deferred consideration payments, along with share-based payments amounting to £4.6mn. The group was also saddled with standard and deferred tax charges which contributed to the net income loss of £500,000 and resulted in a cash taxation outflow of £3.62mn, up 59 per cent on the previous year.

Leaving aside costs linked to the transactions and amortisation, the integration of the new businesses appears to be proceeding smoothly, at least judging by a 211 basis point increase in the operating margin to 16.9 per cent.

We might reasonably expect further turbulence in the economy for the remainder of this year and beyond as central banks crank up interest rates. As stated, the group is in a net cash position with borrowings amounting to a relatively modest £5mn, so tightening credit markets aren’t really material to the group, beyond the likelihood of increased insolvencies in the UK. The group said that UK insolvency numbers have returned to pre-pandemic levels, but it is hard to imagine that the confluence of negative macroeconomic factors will not lead to an increase in corporate debt delinquencies.

Management is “confident of delivering plans for further growth towards the top end of current market expectations”. That chimes with consensus figures compiled by FactSet, which guide for sales of £116mn for full-year 2023, along with adjusted earnings of 9.56p a share, equating to a forward price/earnings ratio of 15 times consensus. This looks good value given the countercyclical play on offer.

SELL: Victoria (VCP)

Despite robust revenue growth, the company made another loss and the shares are struggling, writes Christopher Akers.

Victoria’s shares are down by more than 60 per cent over the past year, with these results not helping matters. Despite the designer, manufacturer, and distributor of floorcoverings posting record revenue, it fell to an increased loss as higher finance costs had their impact.

Like-for-like sales were up by a fifth, with about half the growth driven by volumes and half by prices. Soft flooring sales in the UK and Europe were standouts, up by 31 per cent. Acquisitions helped the revenue uplift and it was a busy year for M&A. Five businesses were purchased, four in the UK and one in the US — the new North American division contributed a not-too-shabby £116mn of revenue over nine months.

But lower-margin acquisitions had an impact on the cash profit margin, which was down by 320 basis points to 16 per cent, and “severe” cost inflation also took its toll. And it was finance costs, up by almost a quarter to £66mn, which dragged the company into the red again. This time around, the main culprit was £33mn of preferred equity costs.

House broker Peel Hunt said that “we are taking a more cautious stance given the consumer environment” and reduced its profit before tax forecasts for the next two financial years by 12 per cent and 16 per cent, respectively. The shares trade at eight times the broker’s 2023 earnings forecast, which does not look too pricey given revenue progress. But this must be offset against high net debt — which is stubbornly high, despite the ratio against cash profits falling to 2.7 times — and the share price performance.

HOLD: AudioBoom (BOOM)

Global monthly downloads are up 35 per cent year on year at the Aim-traded audio and podcasting distribution platform, writes Jemma Slingo.

AudioBoom seems to be doing everything right. The Aim-traded company has an inventive business model, connecting podcasters with advertisers, distributing shows across a variety of platforms and producing its own content.

Podcasts are now big business, and the group is growing fast. Global monthly downloads have risen by 35 per cent over the past year and revenue almost doubled in the past six months. This helped it to achieve adjusted Ebitda of $2mn (£1.66mn), up from $0.2mn in 2021.

Gross profit margins have shrunk slightly, from 22 per cent in December 2021 to 20 per cent in 2022. This is not necessarily alarming, however. The group has a mix of revenue streams, contributing a wide range of gross margins. Its production arm, AudioBoom Studios, for example, contributed a 31 per cent gross margin in 2022, and management said this will be a “key area of focus” going forwards. In contrast, the growth of “sonic influencer marketing” — which has a margin of just 10 per cent — has affected group-wide figures.

Advertising revenue more generally is worth paying attention to, however. Average global revenue per 1,000 downloads rose by 12 per cent in the first half of 2022, and the group has already secured advertising bookings of more than $68mn for 2022 — 13 per cent higher than the entirety of last year’s revenue.

However, management expects the advertising market to be “further tested” by the economic downturn and has noted a softening in advertiser demand for the third quarter of 2022. It added that it is too early to report if this will continue into the fourth quarter.

Given AudioBoom’s hefty valuation — it has a forward price/earnings ratio of 38 — this might be a cause for concern.

Hermione Taylor: Euro-dollar parity matters for UK investors too

Big news last week as the euro and dollar reached parity, trading at a one-to-one rate. The last time this happened was over 20 years ago. And it marks a significant slide: this time last year, one euro would have got you almost $1.20.

This parity is a function of a very strong dollar and a pretty weak euro. And there are three key drivers of this. The first is that interest rates in the US are still significantly higher than in the eurozone, with another substantial US hike likely next week. This has seen investors rush to lock in higher short-term interest rates, increasing demand for the dollar.

The gloomy global economic climate is contributing to the dollar’s strength too. The dollar is traditionally a safe haven currency, whereas the euro tends to move more pro-cyclically — weakening as the economic outlook darkens.

The eurozone also finds itself in a more precarious economic position. Jessica Hinds, senior Europe economist at Capital Economics, argues that the eurozone economies are more vulnerable to rising energy prices than the US, especially given the risk of Russian threats to energy supplies. ING economists also argue that the US entered its rate-increase cycle with more momentum and a positive output gap. The EU, on the other hand, is about to embark on its own tightening cycle with concerns about spiralling bond spreads and asymmetric impacts on member states. This combination of stronger growth and better energy resilience have made the dollar more attractive, fuelling an appreciation against the euro.

All very interesting, but what does this mean for the UK? More than you might think. The UK is playing piggy in the middle: weak against the dollar, but relatively strong against the euro. Even if your investments are heavily UK skewed, this matters. First, companies importing in dollars will face higher prices: bad news, given the already high raw material prices. It will, however, render euro-denominated imports cheaper. Exporters trading in dollars will find themselves more competitive, whereas exports to the eurozone will become relatively expensive.

It would also be a mistake to think of UK-listed companies as UK based: only 24 per cent of FTSE 350 total revenue is generated in the UK. Almost 15 per cent of revenue is generated in the EU, and the weak euro is bad news for these European-focused companies: euro-denominated revenues will convert back to fewer pounds. Yet the opposite is true for US-facing firms who can now convert dollar revenues into sterling at more favourable rates. 23 per cent of FTSE 350 revenue is generated in the US — almost as much as in the UK. UK investors with holdings aligned to world markets might also be more exposed to dollars than they think: the US stock market accounts for around 67 per cent of the MSCI World Index.

Euro-dollar parity also teaches us an important lesson about ‘psychological barriers’: key values used as entry or exit levels by investors. They are often set at whole numbers and we tend to see high levels of market activity when they are breached. ING’s global head of markets, Chris Turner, highlights that the dollar to Swiss franc exchange rate fell 5 per cent within a week of hitting parity in May and June. The euro-dollar exchange rate looks set for similar volatility as it bounces around parity: Turner forecasts that EUR/USD will trade at around 1.05 over the summer, but with a “highly volatile range”.

Psychological barriers come into play elsewhere, too — a 2019 research paper found evidence of them in cryptocurrency markets. The report argued that given the cryptocurrency market is inhabited by inexperienced investors, it is more susceptible to the decision-making biases usually associated with psychological price barriers. And they seem to have been proved right: much was made of bitcoin dipping below its own psychological barrier of $20,000 last month. To an outside observer, sensational reports about marginal price changes can seem overblown. Psychological barriers might help to explain all the fuss.

Hermione Taylor is an economics writer for Investors’ Chronicle