Cost discipline and franchise strength in evidence

Numis Corporation 9 May 2019 Update
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Numis Corporation

Cost discipline and franchise strength in evidence

H119 results

Financial services

9 May 2019

Price

261p

Market cap

£278m

Net cash (£m) end March 2019

78.9

Shares in issue

106.0m

Free float

75%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.0

3.6

(37.1)

Rel (local)

9.0

0.4

(34.4)

52-week high/low

440.0p

221.5p

Business description

Numis is one of the UK's leading independent corporate advisory and stockbroking groups, offering a full range of research, execution, equity capital markets, corporate broking and advisory services. It employs over 270 staff in offices in London and New York, and at the end of September 2018 had 210 corporate clients.

Next events

FY19 trading update

September 2019

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Numis Corporation is a research client of Edison Investment Research Limited

In particularly difficult market conditions, Numis’s franchise strength and maintenance of the compensation ratio softened the impact of lower investment banking and equities revenue. Earnings per share were still down by two-thirds compared with H118 but, looking ahead, a return to a more favourable environment should allow Numis to deliver attractive returns on equity once more (historical five-year average c 20%).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

112.3

32.5

22.4

12.0

11.7

4.6

09/17

130.1

38.3

25.9

12.0

10.1

4.6

09/18

136.0

31.6

23.0

12.0

11.3

4.6

09/19e

117.6

18.1

12.7

12.0

20.6

4.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H119 results

As foreshadowed in the March update, H119 trading was affected by the uncertain UK political background and equity market volatility. Compared with H118, overall revenues were down 25% within which investment banking was down 24% and Equities 28%. The adverse background did not stop further growth in the franchise with the corporate client count increasing by a net six companies to 214. A reduction in variable compensation allowed the compensation ratio to be held stable at 54%, despite an increase of 14% in the average headcount following last year’s investment in hiring to support future growth. Even so, underlying operating profit was 58% lower and pre-tax profit was down 64% to £7.1m. Diluted EPS was 5.0p vs 14.6p, while the interim dividend was unchanged at 5.5p.

Outlook

The timing and nature of an eventual resolution of the Brexit impasse should be a key driver of a revival in earnings for Numis and its peers. While this keeps being deferred it does seem plausible that there is a significant level of deferred corporate activity that will eventually be released as confidence returns. Even without this there is evidence in the first half that Numis’s investment in supporting its service delivery is helping limit the impact of reduced activity levels, especially in equity capital markets. The investment should also mean the group is well placed to take opportunities to increase market share over the medium to long term.

Valuation

Our earnings estimate for FY19 has been reduced by 20% reflecting higher non-staff costs and more conservative revenue assumptions for H219. This points to a prospective ROE of 10% for the current year whereas a ROE/COE model suggests the market is discounting a return of c 16% at the current price. Given the historical five-year average of 20%, this still leaves significant upside as the market environment becomes less challenging.

Key points from H119 results

As noted, group revenue was 25% lower than H118 within which investment banking was down 24% and equities 28% (see Exhibit 1 for details). The first half of last year was a tougher comparative period for investment banking than the second half and, sequentially, its revenues were just ahead of H218, with a pick-up in M&A advisory fees and private capital markets offsetting much-reduced IPO activity. This was a creditable performance in a period in which Numis notes that overall UK equity capital markets activity was approximately 50% lower (H119 versus H218). Average deal fees matched the level for FY18, reflecting deal size and the seniority of roles secured: both potentially positive indicators and linked by Numis to the continuing strengthening of the quality of the client base. During the period the market capitalisation of clients added was above those leaving, with an average for all clients of £836m versus £711m for H118. The 214 corporate clients at end H119, a net increase of six since H118, included six FTSE 100 index and 48 FTSE 250 constituents.

Within equities, institutional commissions were down by 12% reflecting lower trading activity but still robust payments for research with Numis looking for these to be broadly maintained for FY19 as a whole. Trading income (-92%) was affected by the trading background but was particularly impacted by a rare underwriting loss of c £3m (before related corporate fee) associated with the Kier rights issue during the period.

The other operating income line moved from a positive £0.4m contribution to a loss of £1.4m. This arose from a £0.9m write down on unquoted investments and a loss of £0.5m on the one remaining quoted investment. This left total income down 27% compared with the prior-year period.

Exhibit 1: P&L analysis

£m unless stated

H118

H218

H119

Change H119/H118

Net trading gains

4.6

5.0

0.4

-92.1%

Institutional commissions

18.7

19.1

16.5

-11.8%

Equities

23.3

24.2

16.9

-27.5%

Corporate retainers

6.1

6.3

6.4

4.9%

Advisory fees

11.7

5.6

7.5

-35.7%

Placing commissions / capital markets

33.0

25.8

24.9

-24.7%

Investment banking

50.9

37.7

38.8

-23.7%

Total revenue

74.1

61.9

55.7

-24.9%

Other operating income

0.4

1.3

(1.4)

N/A

Total income

74.5

63.2

54.3

-27.2%

Staff costs

(40.0)

(35.4)

(30.2)

-24.4%

Non-staff costs

(14.9)

(16.2)

(17.4)

16.8%

Total administrative expenses

(54.8)

(51.5)

(47.6)

-13.2%

Operating profit / loss

19.7

11.7

6.7

-66.0%

Finance income/expense

(0.2)

0.4

0.4

N/A

Pre-tax profit

19.5

12.1

7.1

-63.6%

Tax

(2.7)

(2.3)

(1.4)

-48.6%

Effective tax rate

13.9%

18.6%

19.6%

41.2%

Attributable profit

16.8

9.9

5.7

-66.0%

Diluted EPS (p)

14.6

8.5

5.0

-66.0%

Dividend (p)

5.5

6.5

5.5

0.0%

Source: Numis, Edison Investment Research

Turning to expenses, the level of staff costs was 24.4% lower as a reduction in variable compensation allowed the compensation ratio to be held stable at 54%, despite an increase of 13.5% in the average headcount following last year’s investment in hiring to support future growth. Although further additions may be considered if market conditions provide good opportunities, the group does not expect a material change in staff numbers during the second half.

In contrast, non-staff costs saw increases of 16.8% and 7.5% compared with H118 and H218 respectively. This was driven by a combination of the costs associated with the increase in headcount, including additional data services, an element of one-off data-related fees arising from a periodic audit of usage and continuing spending to strengthen systems supporting regulatory compliance further. Operating profit was 66% lower, 58% on an underlying basis, excluding gains or losses from the investment portfolio. Pre-tax profit was down 64% to £7.1m and diluted EPS was 5.0p vs 14.6p; the interim dividend was unchanged at 5.5p.

Background and outlook

Recent equity market trends are shown in Exhibits 2 and 3. The sharp decline in equity indices in the final quarter of calendar year 2018 and the subsequent recovery and pull back in volatility are clear. The first chart also illustrates the outperformance of the FTSE SmallCap index compared with the All-Share and AIM All-Share indices over the five-year period shown. At the time of writing the All-Share and SmallCap indices were down modestly, whereas the AIM /All-Share was down 12% for Numis’s financial year to date. Compared with the final quarter of calendar year 2018 this creates a potentially more positive background for corporate activity once political uncertainty subsides.

Exhibit 2: FTSE AIM, All-Share and Small Cap indices

Exhibit 3: FTSE 100 volatility index

Source: Refinitiv

Source: Refinitiv

Exhibit 2: FTSE AIM, All-Share and Small Cap indices

Source: Refinitiv

Exhibit 3: FTSE 100 volatility index

Source: Refinitiv

As shown in Exhibit 4, the average daily value traded on the London Stock Exchange order book has been on a downward trend in recent months. A cautionary note for the near term but this could reverse quickly given greater market confidence on the macro outlook and Numis indicated that April trading in equities continued at a similar level to the first half.

Exhibit 4: London Stock Exchange electronic order book, average daily value traded

Source: London Stock Exchange

The LSE’s new and further issuance figures for the main market and AIM (Exhibits 5 and 6) show the very subdued background in Numis’s H119 and some revival in activity in April. For the main market much of this value related to a placing by Astra Zeneca (£2.9bn). Numis has reported that it completed a number of transactions in April, although they have been generally lower value fee events. Nevertheless, the pipeline is promising, with a greater number of M&A opportunities offsetting a reduction in the number of IPOs in the pipeline. The breadth of the pipeline has narrowed somewhat so the near-term outcome is even more uncertain than usual, depending on the incidence of specific completed transactions.

Exhibit 5: LSE main market new and further issuance

Exhibit 6: LSE AIM new and further issuance

Source: London Stock Exchange

Source: London Stock Exchange

Exhibit 5: LSE main market new and further issuance

Source: London Stock Exchange

Exhibit 6: LSE AIM new and further issuance

Source: London Stock Exchange

Greater political certainty remains elusive but we see the prospect a significant revival in activity once it arrives as plausible, and Numis’s investment in its franchise leaves it well positioned to take advantage of opportunities as they arise. This should allow it to generate significantly more attractive returns on equity than during the first half (8% annualised compared with the historical five-year average c 20%).

Strategically, the group remains committed to its vision of creating the investment bank of a generation by building the size and quality of its franchise, becoming the leading UK equities platform, developing complementary products/services, maintaining operating/capital disciplines and delivering shareholder returns (for more details see our January note).

Financials

We have adjusted our estimates to allow for the first-half numbers including a reduction in other income and somewhat higher non-staff expenses than previously. The continued deadlock surrounding Brexit has contributed to slightly more conservative revenue assumptions. Key lines from our estimates for FY19 are summarised in Exhibit 7 below. We look to put in place estimates for FY20 nearer the year end, potentially with the benefit of greater clarity on the UK political outlook.

Exhibit 7: Estimate revisions

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

09/19e

119.7

117.6

-1.8%

22.3

18.1

-18.9%

15.8

12.7

-20.0%

12.0

12.0

0.0%

Source: Edison Investment Research

The modest reduction in our revenue estimate combined with a small increase in overall costs results in a 16% reduction at the operating profit level, which is amplified by the assumption of a loss rather than profit for other income resulting in 19% and 20% falls in pre-tax profit and EPS estimates respectively. A comparison of our segmental revenue estimates is shown in Exhibit 8 with further detail for the P&L, balance sheet and cash flow shown in the financial summary (Exhibit 10).

Exhibit 8: Revenue analysis

£000s

2018

2019e

Change

Old 2019e

New vs old

Net trading gains

9,594

3,600

-62%

3,500

3%

Institutional income

37,866

34,000

-10%

35,000

-3%

Equities

47,460

37,600

-21%

38,500

-2%

Corporate retainers

12,430

13,000

5%

13,000

0%

Advisory fees

17,335

17,000

-2%

17,200

-1%

Placing commissions/capital markets

58,822

50,000

-15%

51,000

-2%

Investment Banking

88,587

80,000

-10%

81,200

-1%

Total revenue

136,047

117,600

-14%

119,700

-2%

Source: Edison Investment Research

Regulatory capital is significantly higher than required providing stability and flexibility. At the half year end net cash stood at £78.9m (£82.5m H118 and £111.7m FY18) and additional liquidity has been provided by a new £35m credit facility that will further enhance the ability to engage in larger transactions. The facility is committed for three years and the costs associated with it are expected to be offset by the saving generated by Numis becoming a direct clearing member of LCH, a move that itself is enabled by the structure of the new facility.

Valuation

We have updated our peer comparison table in Exhibit 9; this includes UK quoted brokers and a selection of US and European investment banks and advisory firms. The absence of UK peer prospective P/Es and the continuing uncertainty of the political background means this measure is of limited use, although on our reduced estimate Numis trades well above its international peers. In terms of price to book ratio, Numis trades above the UK average but at a similar level to the international companies. We have shown the H119 annualised ROE for Numis of 8.1% but, as noted earlier, the five-year average return was 20%. At 261p a ROE/COE model suggests the market is discounting an ROE of c 16%, still leaving significant upside once trading conditions allow a return to previous levels of ROE.

Exhibit 9: Peer comparison

Price
(local)

Market cap
(£m)

Last reported
P/E (x)

Current P/E
(x)

Yield
(%)

ROE
(%)

Price to book
(x)

UK brokers

Numis

261

279

11.3

22.0

4.6

8.1

2.0

Arden Partners

23

7

Loss

N/A

0.0

N/A

0.7

Cenkos

62

35

14.8

N/A

7.3

25.3

1.3

Shore Capital

222

48

17.8

N/A

4.5

4.8

0.8

WH Ireland

49

21

Loss

N/A

0.0

N/A

1.4

UK average

14.6

N/A

3.3

12.7

1.2

US, European IB and advisory

Bank of America

29.8

283,344

11.4

10.4

1.8

10.5

1.1

Evercore

89.8

4,262

10.0

11.0

2.1

69.7

4.7

Goldman Sachs

201.0

73,515

8.0

8.6

1.6

12.3

1.0

Greenhill

18.9

391

N/A

N/A

1.1

29.7

6.2

JP Morgan

112.6

365,304

12.5

11.2

2.2

13.0

1.4

Moelis

35.8

2,138

11.9

14.0

5.2

60.4

5.0

Morgan Stanley

46.5

78,274

9.8

9.3

2.4

11.8

1.1

Stifel Financial

58.7

4,166

11.1

10.2

0.8

14.2

1.4

Credit Suisse

12.8

32,787

11.9

9.6

2.0

6.9

0.7

Deutsche Bank

7.0

14,549

16.1

13.2

1.6

0.3

0.2

UBS

12.3

47,386

9.7

9.9

5.7

5.3

0.9

US, European IB and advisory average

11.2

10.7

2.4

21.3

2.2

Source: Refinitiv. Note: Priced at 8 May 2019, P/Es are for financial years therefore not all same period end.

Exhibit 10: Financial summary

£'000s

2015

2016

2017

2018

2019e

Year end 30 September

PROFIT & LOSS

Revenue

 

 

97,985

112,335

130,095

136,047

117,600

Administrative expenses (excl. amortisation and depreciation)

(65,018)

(76,120)

(83,626)

(94,603)

(87,284)

Share based payment

(4,104)

(6,229)

(10,454)

(10,583)

(11,000)

EBITDA

 

 

28,863

29,986

36,015

30,861

19,316

Depreciation

 

 

(882)

(1,126)

(1,226)

(1,113)

(1,100)

Amortisation

(111)

(125)

(89)

(49)

(30)

Operating Profit (before amort. and except).

 

 

27,870

28,735

34,700

29,699

18,186

Net finance income

190

37

188

212

810

Other operating income

(1,978)

3,759

3,431

1,733

(900)

Profit before tax

 

 

26,082

32,531

38,319

31,644

18,096

Tax

(4,533)

(6,132)

(7,942)

(4,967)

(3,529)

Profit after tax (FRS 3)

 

 

21,549

26,399

30,377

26,677

14,567

Average diluted number of shares outstanding (m)

117.6

118.0

117.2

115.8

114.9

EPS - basic (p)

19.5

23.5

27.4

25.1

13.8

EPS - diluted (p)

 

 

18.3

22.4

25.9

23.0

12.7

Dividend per share (p)

11.50

12.00

12.00

12.00

12.00

NAV per share (p)

102.0

113.5

125.0

135.0

133.0

ROE (%)

19%

22%

23%

19%

10.3%

EBITDA margin (%)

29.5%

26.7%

27.7%

22.7%

16.4%

Operating margin (before GW and except.) (%)

28.4%

25.6%

26.7%

21.8%

15.5%

BALANCE SHEET

Fixed assets

 

 

6,724

5,522

6,147

8,215

6,103

Current assets

 

 

279,114

312,462

407,850

533,033

373,195

Total assets

 

 

285,838

317,984

413,997

541,248

379,298

Current liabilities

 

 

(170,319)

(188,895)

(280,371)

(398,112)

(239,378)

Long term liabilities

0

(12)

0

0

0

Net assets

 

 

115,519

129,077

133,626

143,136

139,920

CASH FLOW

Operating cash flow

 

 

6,467

48,735

43,369

45,830

(4,283)

Net cash from investing activities

(3,632)

84

(198)

(1,014)

350

Net cash from (used in) financing

(17,510)

(19,580)

(36,359)

(29,035)

(28,959)

Net cash flow

 

 

(14,675)

29,239

6,812

15,781

(32,891)

Opening net (cash)/debt

 

 

(74,518)

(59,591)

(89,002)

(95,852)

(111,673)

FX effect

 

 

(252)

172

38

40

5

Closing net (cash)/debt

 

 

(59,591)

(89,002)

(95,852)

(111,673)

(78,787)

Source: Company data, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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