Investors’ Chronicle: Begbies Traynor, RWS, Currys

BUY: Begbies Traynor (BEG)

Despite talk of new state support, the insolvency practitioner remains confident of brisker trade ahead, writes Alex Newman.

With the government ruling out nothing in its efforts to contain the spread of the Omicron variant, speculation is mounting that chancellor Rishi Sunak may once again be asked to provide emergency fiscal support for struggling businesses.

As Begbies Traynor released half-year numbers, the Westminster press pack was reporting furlough and state funding for businesses might return if harsher social distancing rules are reintroduced. For the insolvency practitioner’s executive chair, Ric Traynor, any such measures would merely delay the process of “businesses getting back to face reality”.

Although applications for state-guaranteed business loans closed in March, furlough support remained in place for much of the period covered by Begbies’ half-year results.

For distressed firms, this reality was forestalled. For Begbies, this meant depressed trading in the business recovery and financial advisory division, which saw a £600,000 dip in organic revenues, owing to a higher volume of lower value cases. The jump in the top line in the period was almost entirely due to bolt-on deals in the period, although increased instructions for the lower-margin property arm added about £1.6m to turnover on a like-for-like basis.

Now, just a few pandemic-linked company protections remain in place, although they are consequential for Begbies’ end of the market. Until April, small businesses will be guarded from winding up petitions on any creditor claims below £10,000 and given up to three weeks to come up with repayment proposals.

This has had the effect of suppressing the numbers of small- and medium-sized cases Begbies typically handles, although liquidations are reported to be back to pre-pandemic levels. Administrations, which generate more fees, are still well below historic levels, although acquisitions mean Begbies has taken its share of the overall market from 10 to 14 per cent.

Citing a further anticipated pick up in insolvencies by the April financial year end, management is confident of hitting analyst expectations for adjusted pre-tax profits of between £17m and £18.5m.

FactSet-compiled consensus earnings forecasts — again heavily adjusted to account for the near-routine transaction costs and the amortisation of intangibles — are for 8.9p per share for the current year, rising to 9.8p in full-year 2023.

That puts the shares just below their five-year average forward earnings multiple of 14 and on a valuation which we have long-argued overweights mergers and acquisitions execution risk and downplays an excellent niche of consistent instructions and profit growth.

HOLD: RWS (RWS)

The translation and IP specialist has seen sales almost double after the purchase of SDL, writes Jemma Slingo.

At first glance, RWS has had a bumper year. The group’s sales have almost doubled and its adjusted profit before tax is up 66 per cent. However, much of its growth is a result of the acquisition of SDL, one of the world’s largest language service providers.

RWS is divided into four divisions: language services, regulated industries, IP services and language and content technology. On an organic basis — that is to say, before contributions from acquisitions — group revenue dipped 1 per cent in the year to September, hampered by currency headwinds.

The IP services division, which accounts for 16 per of group sales, has been particularly affected by the pandemic: revenue fell a tenth in 2020 and has yet to rebound. Management blames a reduction in patenting activity, exacerbated by a slowdown in the European Patent Office.

Elsewhere, the situation is brighter. RWS’s regulated industries arm — which focuses on the language service needs of the life science, financial, legal and managed healthcare industries — saw organic revenue climb 8 per cent on a constant currency basis, while language services also enjoyed some organic growth.

However, it was the acquisition of SDL in November 2020 that supercharged RWS’s balance sheet. New shares worth £625.5m were issued in order to buy out SDL, whose shareholders received 1.2246 RWS shares for every one they owned. RWS’s share price subsequently dipped in December and January — no doubt partly due to some SDL investors cashing out — but has since begun to climb once again.

Despite the significant costs involved in merging the two businesses, RWS reported a net cash position (before lease liabilities) of £45.3m, compared with net debt of £15.1m the previous year. Management said the integration of SDL’s clients, people and capabilities is now largely complete, and has resulted in £16m in cost synergies so far. Broker Berenberg forecasts a further £12m and £5m of net synergies in full-year 2022 and 2023 respectively.

SDL could also act as a buffer against further Covid turbulence. Following the acquisition, client concentration has reduced and no one client accounts for more than 10 per cent of group-wide turnover.

Shareholders will also be pleased to know that dividends have increased once again, continuing an unbroken record dating back to its 2003 listing. Meanwhile, growth is forecast in FactSet consensus earnings per share estimates of 27.7p for the year to September 2022, and 30.8p the following year. Against this, investors need to weigh up enduring challenges in the legacy business and their impact on margins.

HOLD: Currys (CUR)

Demand is struggling, but the group’s transformation project could signal better times ahead, writes Christopher Akers.

Investment in its online offering benefited Currys during Covid-19, which in the comparable period last year helped to outshine pre-pandemic figures. However, revenue was flat this time around as the retailer formerly known as Dixons Carphone, which sells home electronics and appliances, warned of a tough trading period ahead. Investors responded by marking the shares down by 10 per cent.

Admittedly, the outlook looks troubling in the short term. Management said that “market demand has softened in the run-up to Christmas”, an obviously crucial trading period. The Omicron coronavirus variant is causing more uncertainty for the retail sector, which could hit footfall and demand further. Despite this, management is still confident of reaching adjusted profit before tax of £160m for the full year.

Revenue generation is split between the group’s UK & Ireland and international markets. Sales in the former fell by 4 per cent, driven by a mobile sales decline after the closure of all Carphone Warehouse stores in Ireland in April. This came after the UK stores were shut in 2020, which helped reduce lease liabilities by £171m year on year. Greece was the standout international performer, with sales up 15 per cent to £280m on the back of new store openings and strong air conditioning sales.

Currys’ “omnichannel” strategy approach seeks to transform the business into a slicker operator in how it serves online and in-store customers. The move to a single brand — Currys — in the group’s UK & Ireland market is part of this and online sales growth of 54 per cent over two years is a positive sign. Management said that capital expenditure “will normalise to around 1.5 per cent of sales” after peaking this year.

The group’s free cash flow of £185m was a steep fall against last year’s £499m, but this was due to notably high working capital inflows at the time and cash generation and the balance sheet position was strong enough for the group to reinstate the half-year dividend.

Consensus estimates give adjusted earnings per share of 12p and 17p for the 2022 and 2023 — a price-to-earnings ratio of nine times and seven times is the result, which looks undemanding. Broker Numis said that “midterm ambitions look challenging”, with cost pressures and a difficult trading period ahead, and we agree. But there is enough in Currys’ offering for us to remain steady for now.