Small Cap Value Report (1 May 2015) - BEG, FRP, AST, JSG

1st May '15 by Paul Scott

5 comments 18477 reads

Good morning!

A fairly quick report today, as I've been summoned to a meeting in London this afternoon. For anyone interested, I've recorded the final Day 5 video update for my charity challenge, and the video morphed into a brief SCVR (from 5:10). It saved loads of time typing actually, so if people like the idea of a video format (without me being silly), then I could maybe supplement the main reports here with a video of opinions on other news that day? Let me know what you think. Thanks again for all the generous donations!

Begbies Traynor (LON:BEG)

Share price: 41.5p (down 13% today)
No. shares: 104.6m
Market Cap: £43.4m

Profit warning - I doubt that anyone predicted in early 2008 that interest rates would be reduced to near zero, and left there for seven years+, but that's what has happened. As a result, insolvency practitioners have had lean pickings. The only listed insolvency practitioner is Begbies Traynor, and as you can see, their turnover has fallen dramatically, and they've only maintained profits by repeated cost cutting. Analysts are predicting sharp rebounds in turnover (some of which is from acquisitions) but not much increase in profits;

Today Begbies reports that market conditions for them remain tough - corporate insolvencies are down 14% for the year to 31 Mar 2015. For calendar Q1 of 2015 the level was the lowest since Q4 of 2007.

This has caused Begbies to issue a profit warning today, saying that despite maintaining its market leading (by number of appointments, but not by fees) position, it will now perform below market expectations for y/e 30 Apr 2015.

Other comments sound reassuring - more cost cutting has been done, the recent acquisition of Eddisons has gone well, and the group is "comfortably within" its banking facilities.

Sounding a bit like the angel of death, Ric Traynor laments that so few companies are going bust;

Valuation - broker forecast for y/e 30 Apr 2015 is currently for 3.4p EPS, jumping to 4.7p next year. I don't know how much those estimates will come down, but it would probably be safe to assume that, as the warning has come right at the end of the year, that it's not a big miss. Perhaps 3.0p EPS?

That would put the shares on a PER of…

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imranawan

1st May '15

Like the new glasses Paul and the video format.

jraitt

Article in yesterdays Telegraph echoing what you have said about "zombie" Companies only surviving by "Low interest rates, banks' forebearance and leniency of HMRC ahead of election" They estimate 340,000 such Companies 3 times more than in 2009 recession. They predict interest rates to rise "towards the end of this year".
Perhaps a lag before profits begin to come through but surely one worth watching.

mrwhits

Hi Paul,

Regards FRP.L, I'm a holder too, but after crunching the numbers from the last year end I must say that their debtor days look awful!

As per your balance sheet analysis I make debtors over 61% of turnover, current ratio a healthier (very) 2.37, so I guess those debtors are the delays in being paid for the cases they have running, and have had so for some time.

Given the current ratio I'm still holding, but with one eye on that figure next report.

I also make cf/ps slightly negative for the last full year(-4p), due to acquisition costs, which if you take them off I get something like cash flow positive per share of approx 18p.

Any thoughts on the above?

Regards

mrwhits.

Paul Scott

Hi Mrwhits,

The business model of Fairpoint (LON:FRP) is different to most companies. So they don't sell goods or services as such, and collect the money in about 60 days later. Instead they have various activities where they receive a stream of payments over a period of time, e.g. for IVA cases, PPI claims, etc.

The nature of that work is that they have a very extended debtor book. Similar situation with Begbies Traynor (LON:BEG) actually, where they also rack up loads of costs, leave them on the balance sheet within work-in-progress, and then receive payment maybe a year later, when the case is closed.

There are risks with this type of business model - i.e. a big debtor book can contain hidden nasties, and you often need a helpful back to finance the big debtor book. But in both these companies cases, it's just the way their business model works.

So debtor days is not such a useful measure in these specific cases.

Regards, Paul.

Highpeak

6th May '15

Hi Paul, I too like JSG and am considering adding to my current holding. Therefore, the share placing at 73p is of interest but it appears that it is only available to Institutional investors rather than private investors? I guess there may be a pull back on the day of issue (7th May) which might provide an opportunity.

Small Cap Value Report (1 May 2015) - BEG, FRP, AST, JSG

Begbies Traynor (LON:BEG)

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Paul Scott

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