At first glance, insolvency and business advisory firm Begbies Traynor (BEG:AIM) doesn’t shout ‘growth stock’ but over the last five years the group has doubled its revenue and trebled its pre-tax profit thanks to a mix of organic growth and acquisitions.

It is now the leading insolvency practice in the UK with a 13% market share and is second to FRP Advisory (FRP:AIM) in the higher-value company administrations market with an 11% market share.

As its results for the year to April showed, the firm is growing ahead of expectations while expanding its operating margin as it increases its scale and breadth of services.

Its substantial free cash flow generation means it is also able to source acquisitions, grow its dividend and still end up with net cash.

Current trading is strong with a 19% increase in its insolvency book, which generates around 60% of turnover, and the firm is gaining ground in larger, more complex cases.

‘We have started our new financial year confident in our outlook’, says executive chairman Ric Traynor.

‘The increased scale of the group with complementary professional services and an enhanced client base provides a strong platform for us to continue delivering growth.

‘With 80% of income generated from counter-cyclical and defensive activities, we are well-positioned in the current challenging economic environment.’

In conversation with Shares, Traynor agreed the UK economy was ‘nothing like 2008’ but he expects insolvencies to keep rising as firms face unrelenting cost pressures and a dearth of funding as lenders become more risk-averse.

Traynor also flagged the fact more companies are experiencing cash-flow strains due to holding too much inventory, which he described as a hangover from the supply chain squeeze caused by the pandemic and the invasion of Ukraine.

Given the number of firms already in trouble and the likelihood more will join them, we suspect the market is undervaluing Begbies’ growth potential.

Shore Capital’s Vivek Raja suggests there is upside risk to his earnings forecasts due to the firm’s increasing involvement in administrations, which, although they take longer than liquidations, are twice as profitable.

With the shares trading on a current-year PE (price-to-earnings) ratio of just 12 times against a five-year average of 16 times, ‘this discount looks wrong given the current business tailwinds and positive outlook’ says Raja.

Analysts at Berenberg also see upside risk to their earnings estimates as the firm is likely to use its growing cash flow to add more revenues through acquisitions, and describe the shares as ‘attractively priced’ at their current level.

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