The Investment Column: Clouds over economy have silver lining for insolvency specialist

GoIndustry; Oakdene Homes
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The Independent Online

Our view: Hold

Share price: 112.5p (+8.75p)

The insolvency specialist Begbies Traynor had good reason to welcome the credit crunch. Up to last autumn its highly trained and expensive teams of experts had been sitting on their hands enduring the quietest period of corporate insolvency for 20 years. The era of cheap money meant that companies which should have been heading for the corporate graveyard were left free to carry on trading – until now, that is.

The first half of the year turned out to be the worst for the firm since it floated on AIM in 2004. Revenue was flat at £21.9m, while profits fell by 44 per cent to £.2.1m as income from insolvency work dried up.

Begbies is paying an unchanged dividend – a gesture of confidence underpinned by the latest insolvency figures beginning to cloud the corporate horizon.

The casualties are across the board and mounting, from retailing to construction and property to manufacturing. Begbies is called into problem companies either to help with remedial action to stave off disaster, or when it is too late and it is appointed administrator.

Begbies has learnt lessons from the past year or so. It accepts it had grown too dependent on insolvency work, which was responsible for half of its income. The task now is to beef up its other activities such as corporate finance, consulting and tax advice. Yesterday it announced the acquisition of the leading independent tax adviser Shaw. It is also keen to develop restructuring focused on companies with turnover of £10m to £25m a year.

The increase in insolvency cases which started to come through in November should lift full-year profits to April to around £7m, leaving the shares trading on around 20 times earnings, which looks full enough for now. Hold.

GoIndustry

Our view: Buy

Share price: 11p (-0.75p)

GoIndustry runs online auctions of unwanted factory machinery which is usually bought by companies setting up in low-cost manufacturing bases abroad. If it sounds like a cottage industry, think again.

The market, which deals in machine tools, plastics, food processing and electronics equipment, is worth billions of pounds, and is growing fast as more manufacturing migrates from the West to the East.

GoIndustry's share of this market barely registers at just 0.5 per cent, but that is set to nearly double following the ambitious acquisition of its main rival, US based DoveBid.

As a measure of the importance to GoIndustry, it is financing the deal by placing £18m of shares at a 10 per cent discount to an already depressed price. GoIndustry calls the acquisition transformational, and it certainly looks that way.

GoIndustry was set up in 1999 by three entrepreneurs who recognised the potential of holding online auctions of plant and machinery to reach a near-global audience. It still holds live "under the hammer" auctions in some of the 15 countries in which it operates, but these are diminishing in importance.

Heavy losses over the past few years resulted from a string of "land grab" takeovers aimed at quickly securing market share. DoveBid opens up the US to GoIndustry. The US firm has close ties with multinationals who use it to handle sales of plant after rationalisation programmes.

Costs of around £9m should be stripped out of the enlarged group over the next two years. Even without DoveBid, the UK firm was on course to generate profits of around £2.7m for 2008, selling on just over 12 times earnings.

It is a unique listed company operating in a dynamic marketplace. Buy.

Oakdene Homes

Our view: Avoid

Share price: 66p (-33.5p)

The smallish South-east housebuilder Oakdene Homes was 53 per cent off its year's high when it wheeled out its profit warning yesterday, quickly turning that into a 70 per cent slump.

Profits for last year will now be down from £8.6m to around £5m. A bulk buyer of 30 of the 111 units just built at its flagship residential development at Newhaven walked away. They will now have to be sold to private buyers, which could take some time. The planned purchaser of a major development site also got cold feet.

At times like these a large housebuilder can mothball sites, shrink costs and soldier on. That option is less easy for a small niche player with little else to fall back on.

Oakdene is expecting completions to fall from 228 to 165. Revenue as a result will be down nearly 30 per cent at £37m.

There are some optimistic projects in the pipeline. It hopes to win planning approval for various waterside developments at Newhaven and Southampton, involving 1,100 units. But in this climate it is highly unlikely it will start any serious work until confidence returns to the market. Brokers have cut 2008 forecasts from over £13m to £5.4m, reflecting the downturn expected. A bidder keen on picking up its 1,000-unit-strong land bank could emerge. But otherwise there is little upside for the shares at present. Avoid.

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