A share to profit from UK financial distress

09-11-2017

At end-July, the Q2 Red Flag report re-iterated 25% more situations of significant financial distress, like-for-like, with those property-related up 32%, rather supporting my point about how property is exposed after nearly a decade of asset inflation.

Investors chased Begbies shares up to 67p by mid-September which prompted profit-taking – whether on a short-term technical view or a simple earnings basis, the forward price/earnings (PE) ratio having reached the high teens.

Yet, at 66p currently, there's a material 3.75% prospective yield due to Begbies' very strong cash flow record - the table shows annual multiples of earnings per share (EPS) and zilch capital expenditure needs – being a classic "people business" in value-added services, generating plenty of cash for distribution.

The latest 1 November Red Flag report for Q3 cites a 27% like-for-like increase in significant financial distress situations – nearly half being "zombie" companies, many of which will not survive higher interest rates and employment costs. Indeed, if the credit bubble is about to burst, then potentially there could be widespread fall-out and de-risking price falls in domestic smal

UK inflation may ebb again though

It is important to keep a sense of perspective: this first rate rise only removes what some analysts regarded as an unnecessary knee-jerk reaction – cutting to 0.25% post the EU referendum. Possibly inflationary pressures will ease in the medium term towards the 2% target the Bank of England maintains. Reaching 3% inflation in September may reflect retailers unable to hold off raising prices for competitive reasons, after sterling's devaluation, plus energy costs rising.

Latest minutes to the Bank's monetary policy committee show that, despite a likely recovery in wage growth and spare capacity being absorbed, the effects of rising import prices are likely a one-off factor set to diminish over the next few years, supporting a case for lower inflation in 2018.

Thus, interest rates may not rise further by much - if at all - versus a current sensation "the first rise in a decade" represents a tightening trend.

In which scenario the 2017 rise in insolvencies reflects an overdue reckoning of "zombies", amid uncertainty relating to Brexit also consumer confidence wavering. For the medium term there may be no let-up in debt levels as banks find other ways to manage risk e.g. more appropriate marketing.

Recent grants of options but also exercising

The rise in Begbies' shares has met with various directors and senior managers exercising options, and some deciding to cash in while others retain stock. The board appears confident, however, to see virtue in granting 500,000 share options to one executive director and 200,000 options each to seven senior managers, all with an exercise price of 63.12p.

Source: http://www.iii.co.uk/articles/457369/stockwatch%3A-share-profit-uk-financial-distress