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Begbies Traynor: No growth valuation for booming business

Begbies Traynor Group plc (BEG:LN), the independent UK corporate insolvency firm, has seen a 50%+ share price drop from its 200p Aug-08 high. Although analyst concern has been expressed on a slowdown of its Corporate Finance/Taxation activities (15% of total revenues), we believe this concern is exaggerated, given that Insolvency constitutes more than 80% of the companys revenues. Although no real hard catalyst exists on the Begbies buy case, demand for its insolvency services and news flow on a rise in insolvencies would act as share price drivers: insolvency numbers are expected to remain high into 2010. Note that during the 1990's recession, new insolvencies continued to rise well after the fall in GDP. In 1992, corporate insolvencies peaked at 30,000 or 1% of active companies. With 25% more businesses around, and a more structurally driven recession, the expected peak could well be above 40-45,000 (compared to 21,850 in 2008) and could contribute to significant growth for Begbies for several years to come (taking into account a normal 2-3 year timescale for completion of an insolvency case). At the current 100p, Begbies trades at x9.8 2010 consensus earnings, which seriously undervalues a high-growth/high-margin business with earnings growth north of 20% a year. Conservatively we would expect earnings to grow more than 15% going into 2010. 

Disclosure: Long BEG.L