Insolvency specialist and property services company Begbies Traynor (BEG:AIM) derives two thirds of its revenue from activities which are counter-cyclical, which means that in any future slowdown or even recession the business will see rising demand for its insolvency services.

The company’s shares therefore provide a compelling hedge against future economic difficulties as well as good earnings expansion in the current low growth environment.

That isn’t to say the business needs a recession to perform well as the results for the six months to 31 October amply demonstrated.

Revenue rose 21% aided by acquisitions, but organic growth was still an impressive 10%, while profits surged 29%, helped by improving operating margins, which reached 13.2% (2018: 12.6%) as central costs were reduced as a percentage of revenues.

It is worth noting that businesses can also come under pressure as the economy starts to recover from a difficult period as they risk failing due to cash flow constraints. Therefore Begbies is attractive as an investment in both an economic downturn and upturn.

Chairman Ric Traynor sees increasing activity in the year ahead as the insolvency market continues its recovery. In the 12 months to 30 September volumes expanded by 7% to 16,857 cases nationwide.

This level is still some way off the peak seen in the financial crisis which saw annual insolvency cases peak at close to 25,000.

In anticipation of a growing workload the company has increased its capacity by recruiting additional fee-earners, taking the number of employees working in the insolvency division to 412 from 364 last year.

In October the firm purchased Alexander Lawson Jacobs which brings a team of 24 directors and employees focused on London and the South East.

Typically the firm earns revenue based on hours worked with the fees paid from asset realisations which are approved by creditors. On average each case can last from two to three years.

The company’s other division generates revenues from providing property advisory and consultancy services.

Begbies is the UK’s largest insolvency practitioner by volume with around 8% market share, serving the small and medium sized business community while the big four accountancy firms tend to handle the bigger insolvencies.

The insolvency marketplace is fragmented leaving scope for Begbies to grow by buying up smaller competitors. The business throws off strong free cash flows equivalent to around 10% of revenue.

It had a £2.3m net debt at 31 October 2019. A £25m revolving credit facility and a £5m acquisition facility provides the company with enough firepower to make selective acquisitions.

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