Keeping its eye on longer-term growth

Numis Corporation 14 January 2019 Outlook
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Numis Corporation

Keeping its eye on longer-term growth

FY18 result and outlook

Financial services

14 January 2019

Price

255p

Market cap

£274m

Net cash (£m) at end September 2018

111.7

Shares in issue

107.4m

Free float (AIM rule 26)

75%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.2)

(17.6)

(24.9)

Rel (local)

(7.2)

(16.5)

(15.8)

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 event

AGM trading update

February 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

Key themes from Numis’s FY18 results were the continued growth in the corporate client base, significant investment in staff and other costs to support growth, and maintenance of its institutional client base following MiFID II implementation. Cost growth meant that while revenue reached a new record, profits were lower. Recent market trends suggest profits could be lower again this year and we have reduced our estimate accordingly. Looking beyond this, the investment in strengthening the franchise should mean that Numis is well placed to achieve further significant growth through market cycles.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

112.3

32.5

22.4

12.0

11.4

4.7

09/17

130.1

38.3

25.9

12.0

9.8

4.7

09/18

136.0

31.6

23.0

12.0

11.1

4.7

09/19e

124.9

25.4

18.0

12.0

14.2

4.7

Note: *PBT and EPS are diluted on a reported basis.

Results for FY18

Numis had already indicated in its September trading update that H218 results would be affected by the timing of transactions and a lower average transaction fee level than in the first half. In the event revenue for the full year was 4.6% ahead of FY17. Cost growth was pushed up by investment in additional staff and increases in other costs to strengthen the Numis platform in order to enhance service for existing clients and provide capacity for further growth. Overall cost growth of 11.5% resulted in a 17.4% reduction in pre-tax profits while a lower tax rate meant the earnings per share reduction was 8.4%. The full year dividend was held at 12p and the balance sheet remained strong with cash of over £111m and significant capital head room. The group retains its commitment to controlling the share count and returning excess capital to shareholders through share buybacks.

Investing to build the franchise further

Numis is setting its strategy in the context of its vision of becoming the “investment bank of a generation”. The investment in staff last year led to a 16% increase in the number of staff at the end of the year and this will make an important contribution to a strategy that includes: building the size and quality of the corporate client base, becoming the leading UK equities platform and developing complementary products and services (more detail on page 3). Near-term results will be subject to market conditions but Numis appears well-placed to realise its ambition in the medium term without having to consider the consolidation that may feature elsewhere in the sector.

Valuation: Estimates cut but price has adjusted

Reflecting more challenging current market conditions, we have reduced our FY19 EPS estimate by 30%, but the shares have already fallen by over 45% from their 12-month high and there could be upside for estimates if market uncertainties ease. A ROE/COE model suggests the share price discounts an ROE of c 15%, which appears cautious.

Aspiring to be the investment bank of a generation

Formation and management succession

Numis was founded in the late 1980s and listed on AIM in 1996. It has grown to become a leading UK corporate advisory and stockbroking business and has stated its vision as becoming “the investment bank of a generation”. The current co-CEOs, Alex Ham and Ross Mitchinson, joined the company in 2005 and 2008 respectively and assumed their roles in September 2016. The success of the management transition was signalled when former CEO and founder Oliver Hemsley stepped down from the board and all executive responsibilities in May 2017.

Evidence of franchise strength

Underpinning the growth of the business has been the steady addition of corporate clients with an accompanying increase in their average market capital: at the end of FY18 there were 210 clients with an average market cap of £800m (Exhibit 1). While the average size has increased, Numis has not given up its traditional area of strength in small-cap broking and the median market cap is around £400m. For the last three financial years Numis has ranked number one in the Bloomberg league table for equity capital markets transactions on London markets; it also ranked first in the Extel survey for UK small and mid-caps for the sixth year running underlining the strength of the research and sales team which has also been confirmed by the maintenance of the client base and revenues through the implementation of MiFID II.

Revenue CAGR of 18% since 2012

The evolution of revenues since 2012 is shown in Exhibit 2 demonstrating that growth has been seen across the business but is most striking for the deal fees generated by the capital markets segment that achieved 33% compound growth and contributed more than 40% of last year’s revenue. Institutional commissions account for 28% of the total and have recorded 10% CAGR despite persistent pressure on commission rates, even before changes that took place in the run up to the implementation of MiFID II. Corporate retainers provide a resilient source of annual fees and have grown with the client base. As would be expected, trading has seen fluctuations in income but has contributed positively in each year and grown significantly over the period shown. Finally, advisory has grown, now accounting for 13% of revenues and is an area of focus for future growth.

The largest element of cost for the business is staff remuneration and for most of the period since 2012 the compensation ratio has remained close to the average value of 54% while the overall cost income ratio has been managed close to the corresponding average of 76%. This has allowed an operating profit margin of between 22% and 29% for the years shown with the exception of 2012 when profitability was still depressed in the wake of the financial crisis (operating margin 7.5%).

Exhibit 1: Corporate client numbers and market cap

Exhibit 2: Revenue progression (year to 30 September)

Source: Numis, Edison Investment Research

Source: Numis, Edison Investment Research

Exhibit 1: Corporate client numbers and market cap

Source: Numis, Edison Investment Research

Exhibit 2: Revenue progression (year to 30 September)

Source: Numis, Edison Investment Research

Vision and strategy

Within the group’s overall vision of becoming the investment bank of a generation, management has identified five strategic pillars that, if executed successfully, should secure sustainable growth (subject to market cycles), profitability and attractive shareholder returns.

1)

Build the size and quality of the corporate franchise. Here, as noted above, Numis has a strong starting base and track record of success. The aim is to grow across the range of market caps and to be a natural home for interesting small-cap companies. The investment made in additional staff will help support this effort enabling high levels of service to be maintained as the client base expands. To help achieve the target, sector performance will be monitored and teams will be given accountability. While the significant increase in headcount seen in FY18 is unlikely to be repeated in the current year further hires will be made where there is scope to fill gaps. Technology investment also contributes here with the recently launched app for corporate clients providing them with relevant information from the Numis platform in a readily accessible manner. While there is no shortage of competition in the market for corporate clients, Numis appears well-placed given the position it already has and the access to institutional clients it has maintained following MiFID II.

2)

Become the leading UK equities platform. This reflects the ambition to grow the equity capital markets market share further and to build on the success to date in maintaining institutional relationships and research ranking. Achieving this will involve making the most of the staff additions during FY18 and ensuring that institutional relationships are sustained as these clients continue to refine their budgets in the wake of MiFID II. The latter point remains a source of uncertainty for all brokers but, again, Numis appears relatively well-placed given its research coverage and existing position.

3)

Develop complementary products and services. Numis seeks to increase its advisory revenues, continue to develop its private markets activity and identify additional new areas for development. The strengthening of the advisory business will help deepen the group’s engagement with corporate clients, incorporating strategic advice in addition to existing corporate finance services. The private markets area actually experienced a disappointing level of private placements in FY18 but, strategically, this remains a business Numis is keen to develop given the trend for developing businesses to remain unquoted for longer and the potential it offers to enlarge the network of companies from which future public market flotations may flow. It also enables Numis to develop additional relationships with those institutions that invest in unquoted companies.

4)

Maintain operating and capital discipline. While the investment in new staff over the last financial year has affected the cost base, the group remains committed to managing cost ratios over the cycle. Attention is to be paid to realising efficiency improvements and there is cost accountability across the different activities that should help ensure that there is a balanced and targeted approach taken to additional spending. The test of this approach could come if there is a significant market downturn where there is not an immediate correction. In this circumstance the challenge will be to maintain the benefits of the investment made in strengthening the platform whilst moderating the impact of lower revenues on profitability.

5)

Deliver shareholder returns. The first four strategic pillars should feed into attractive returns for shareholders over the cycle. Revenue growth paired with maintained or improved profit margin would generate higher earnings and a sustained or improved ROE. New complementary products and services would help diversify revenues and reduce their volatility to some extent. Finally, the continued commitment to offsetting share issuance from staff compensation schemes with buybacks and using the same mechanism to return excess cash to shareholders should help protect returns and earnings per share.

FY18 results

Revenue growth of 4.6% for FY18 versus FY17 was slightly ahead of the indication of approximately 3% given at the time of the trading update in September reflecting the timing of transactions close to the year end. Cost growth of 11.5%, driven mainly by investment in additional staff, left pre-tax profits down by 17.4% and EPS 8.4% lower after a reduced effective tax rate of 15.7% versus 20.7%. Exhibit 3 provides a summary of the figures including the segmental revenue analysis while key points are noted below. Figures are compared with FY17 unless stated.

Exhibit 3: Profit and loss analysis

£m unless stated

FY17

FY18

FY18/FY17

H217

H118

H218

H218/H217

Net trading gains

9.0

9.6

6.0%

4.1

4.6

5.0

24.4%

Institutional commissions

35.8

37.9

5.9%

17.3

18.7

19.1

10.6%

Equities

44.8

47.5

5.9%

21.4

23.3

24.2

13.2%

Corporate retainers

11.6

12.4

7.4%

6.0

6.1

6.3

5.8%

Advisory fees

14.4

17.3

20.8%

8.0

11.7

5.6

(30.1%)

Placing commissions / capital markets

59.4

58.8

(0.9%)

42.4

33.0

25.8

(39.1%)

Corporate broking and advisory

85.3

88.6

3.9%

56.3

50.9

37.7

(33.0%)

Total revenue

130.1

136.0

4.6%

77.7

74.1

61.9

(20.3%)

Other operating income

3.4

1.7

(49.5%)

2.0

0.4

1.3

(33.0%)

Total income

133.5

137.8

3.2%

79.7

74.5

63.2

(20.6%)

Staff costs

(69.0)

(75.3)

9.2%

(38.7)

(40.0)

(35.4)

()8.7%

Non-staff costs

(26.4)

(31.0)

17.5%

(13.3)

(14.9)

(16.2)

21.4%

Total administrative expenses

(95.4)

(106.3)

11.5%

(52.1)

(54.8)

(51.5)

(1.0%)

Operating profit / loss

38.1

31.4

(17.6%)

27.6

19.7

11.7

(57.6%)

Finance income/expense

0.2

0.2

12.8%

0.2

(0.2)

0.4

85.8%

Pre-tax profit

38.3

31.6

(17.4%)

27.9

19.5

12.1

(56.5%)

Tax

(7.9)

(5.0)

(37.5%)

(6.3)

(2.7)

(2.3)

(64.3%)

Effective tax rate

20.7%

15.7%

(24.3%)

22.6%

13.9%

18.6%

(18.0%)

Attributable profit

30.4

26.7

(12.2%)

21.5

16.8

9.9

(54.2%)

Diluted EPS (p)

25.9

23.0

(11.1%)

18.3

14.6

8.5

(53.6%)

Dividend (p)

12.0

12.0

0.0%

6.5

5.5

6.5

0.0%

Source: Numis, Edison Investment Research

Equities revenue showed progress (+6%) for the year despite the changes brought about by implementation of MiFID II. The second half also showed progress both sequentially and y-o-y. The institutional client base has not seen a material change and institutional revenues alone mirrored the overall Equities divisional trend.

Corporate broking and advisory revenues were 4% ahead with mixed trends between sub-segments. Strongest was advisory, an area of focus for Numis, where fees were up 21%. Corporate retainer fees were ahead on an increased client count (210 versus 202) and capital markets was close to the record level of FY17 after a sharp reduction in H2 revenue, reflecting the timing of transactions and a lower level of average fees in the period.

The year was one of investment in staff recruitment to support service levels to existing clients and further growth in the business. Additions have been made for both the corporate broking and advisory and equities businesses with the period-end headcount up 16% to 273. Investment has also been made in strengthening the IT infrastructure of the platform. As a result the compensation ratio increased from 53% to 55%.

As noted this resulted in a 17.4% pre-tax profit reduction from £38.3m to £31.6m with a steeper fall in the second half, reflecting the weighting of revenues to the first half.

The full year dividend was unchanged at 12p/share. The group aims to pay a stable dividend while remaining committed to returning excess cash to shareholders and mitigating the dilutive impact of share awards; during the year £16.3m (£22.9m) was spent on buying back shares.

The capital and liquidity position of the group remains strong with cash of £111.7m at the year end compared with £95.9m. Qualifying capital stands at roughly double the regulatory requirement.

Focusing on the investment in additional staff more closely, Exhibit 4 shows how headcount has increased with the corporate client list in recent years. The addition of 38 staff during FY18 represented a step up and the average headcount increased by 7%. This contributed to the reduction in revenue per head (which fell by 9%) after two years of growth of over 12% following 2015, which also saw a large increase in the average number of staff (+11%) and a decline in revenue per head (-5%).

New hires in FY18 were made across both the corporate broking and advisory and equities businesses enhancing coverage and capabilities across a number of sectors. New products and services facilitated by recruitment included an event-driven offering within equities and debt advisory and market intelligence within corporate broking and advisory. Signalling a desire to bring in talent at an earlier stage and confidence in the culture that exists in the business, the group completed both its first graduate recruitment (nine graduates who joined in September) and also undertook its first formal intern programme that involved 16 summer interns. The inclusion of a high proportion of senior staff among the new joiners magnified the impact on costs and hence cost to revenue ratios. As shown in Exhibit 5, both compensation and non-compensation ratios increased as Numis also invested in its technology platform to help meet new regulatory requirements and enhance current and future service levels. The other point to note from this chart is that although there have been variations as noted, cost ratios have been managed with a relatively narrow range over this period (for comparison, during the financial crisis the compensation ratio peaked at 70% in FY09).

Exhibit 4: Expanding headcount to service clients

Exhibit 5: Cost to revenue ratios

Source: Numis, Edison Investment Research

Source: Numis, Edison Investment Research

Exhibit 4: Expanding headcount to service clients

Source: Numis, Edison Investment Research

Exhibit 5: Cost to revenue ratios

Source: Numis, Edison Investment Research

As announced at the interim stage, the Numis Mid Cap fund was liquidated during the second half, a decision based on the view that its performance record over three years (broadly in line with its benchmark) would not justify marketing the fund to third-party investors. This released £12.5m and was the main factor behind a reduction in the investment portfolio from £28.1m to £16.3m during FY18. The portfolio generated a net gain of £1.7m for the year (£3.4m FY17). The portfolio is now primarily unquoted investments (96%) and the aim is to focus on early-stage investments which could benefit from access to the business network that Numis can provide with investments being recycled as they become more mature.

Trading background and outlook

UK equity markets fluctuated during the Numis financial year to end September, notably in early 2018 when volatility spiked, but over the year as a whole the FTSE All-Share, Small Cap and AIM All-Share indices were all in positive territory. Since then a mixture of macroeconomic and geopolitical uncertainties and concerns gained traction prompting a sharp market correction in October and further weakness subsequently (Exhibit 6 shows the index performance for Numis in FY18 and FY19 to date and from five-year highs).

Exhibit 6: Equity indices recent performance

FTSE AIM All-Share

FTSE All-Share

FTSE Small Cap

FY18

9%

2%

2%

FY19 year-to-date

(18%)

(8%)

(8%)

From 5-year high

(18%)

(12%)

(12%)

Source: Thomson Datastream as at 10 January 2019

In addition to the recent equity market weakness, Exhibit 7 highlights the larger movements seen in the FTSE AIM All-Share index over the last five years compared with the All-Share and the FTSE Small Cap index. Putting the recent rise in market volatility into context, Exhibit 8 shows how the FTSE 100 volatility index is now nearer to the higher level that prevailed between 2014 and mid-2016.

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Exhibit 8: FTSE 100 volatility index

Source: Thomson Datastream

Source: Thomson Datastream

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Source: Thomson Datastream

Exhibit 8: FTSE 100 volatility index

Source: Thomson Datastream

Turning to London Stock Exchange (LSE) issuance data, Exhibits 9 and 10 show a mixed picture for activity between the Main market and AIM. The Main market has been resilient with total issuance up 16% in H2 to November and also ahead for the months of October and November alone (the first two months of Numis’s financial year). In contrast, AIM issuance has been very weak (down 42% and 55% for the same periods).

Exhibit 9: LSE Main market issuance

Exhibit 10: LSE AIM issuance

Source: LSE (calendar years)

Source: LSE (calendar years)

Exhibit 9: LSE Main market issuance

Source: LSE (calendar years)

Exhibit 10: LSE AIM issuance

Source: LSE (calendar years)

UK M&A data for the longer term (Exhibit 11) show that the transaction value for the first nine months of 2018 was running at above the annual rate for 2017 although quarterly numbers (Exhibit 12) show a marked drop in domestic activity in the latest quarter, potentially showing the chilling effect of market and political uncertainty (with the caveat that these figures have historically shown considerable volatility between quarters).

Exhibit 11: UK M&A transaction value

Exhibit 12: UK M&A value, recent quarterly trends

Source: ONS. Note: Inbound, outbound and domestic. Excludes deals above £10bn that affected 2016/17 data. Calendar years.

Source: ONS. Note: Not adjusted for large deals 2016/17. Calendar quarters.

Exhibit 11: UK M&A transaction value

Source: ONS. Note: Inbound, outbound and domestic. Excludes deals above £10bn that affected 2016/17 data. Calendar years.

Exhibit 12: UK M&A value, recent quarterly trends

Source: ONS. Note: Not adjusted for large deals 2016/17. Calendar quarters.

Numis’s own experience in terms of corporate transactions has been that the number of transactions in its second half was similar to the first half but that the average deal fee (key variables being deal size and Numis’s role) was lower.

Prospectively, the main economic and geopolitical uncertainties that appear to have contributed to the increase in market volatility remain in play, but the easing of concerns surrounding trade tensions, tightening of monetary policy and Brexit could create a more favourable background in equity markets in due course.

In the near term, as Numis itself has noted, the market background is more challenging for share issuance, trading and M&A activity. In the first two months of FY19, the company completed 14 deals including three IPOs, which was nevertheless a reduction on the level achieved in FY18. Positively, deal fees remained in line with the average level for FY18 and general activity levels in the corporate broking and advisory business were high and the transaction pipeline was strong. Three new corporate clients with an average market capitalisation of £1.4bn have been added since the year end. The equities business has been affected by the increase in volatility and trading profits and institutional revenues were lower than the prior year period in the first two months of FY19.

Looking further ahead, the continued addition of corporate clients combined with the investment in staff provides a sound base for further growth in the business through fluctuations in market levels and activity. On the equities side of the business the signs are that Numis has successfully navigated the introduction of MiFID II, although buy and sell side commentators agree that the market is continuing to assimilate the changes entailed so further jockeying for position may result in additional revenue pressures or gains in market share as institutions refine their budget allocations. If successful, the group’s push to expand the advisory and private markets businesses and new services such as event driven and debt advisory will not only enlarge but also diversify revenue.

In the next section we discuss changes in our estimates for the current year.

Financials

Our estimates for the current year are reduced given the more challenging conditions being experienced currently and highlighted above. As is always the case for capital market participants such as Numis, estimates are particularly vulnerable to changes in market level and sentiment. The impact of positive and negative revenue surprises is mitigated to some extent by the variable component of compensation but there is still a noticeable degree of operational gearing when revenue estimates are changed. As shown in Exhibit 13, our revenue estimate for FY19 is reduced by 15% which, with the assumption that the cost income ratio increase is limited to under three percentage points (to 80%), feeds through to a 30% reduction at the pre-tax profit level. There would probably be upside for estimates if market uncertainties ease. Conversely, a more marked revenue reduction would potentially push the cost income ratio materially higher until activity levels recovered, as management would probably be reluctant to compromise the investments made in the platform for the longer term.

Exhibit 13: Estimate revisions

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

09/18

133.7

136.0

1.8%

27.9

31.6

13.5%

19.8

23.0

16.5%

12.0

12.0

0.0%

09/19e

147.7

124.9

-15.4%

36.3

25.4

-30.0%

25.8

18.0

-30.1%

12.0

12.0

0.0%

Source: Edison Investment Research. Note: 2018 new = actual.

Exhibit 14 details our segmental revenue assumptions for FY19 compared with FY18. We have allowed for an increase in revenue in corporate retainers, reflecting the increase in the number of clients. All other areas are assumed to see a reduction in revenues, particularly in net trading gains that are set closer to the five-year average, resulting in an overall reduction of 6% for the group. Advisory fees are expected to be only marginally lower, buoyed by a focus on expanding the business, including the addition of a debt advisory capability.

Exhibit 14: Analysis of revenue estimate

£000

2018

2019e

Change

Net trading gains

9,594

7,900

-18%

Institutional commissions

37,866

35,800

-5%

Equities

47,460

43,700

-8%

Corporate retainers

12,430

13,000

5%

Advisory fees

17,335

17,200

-1%

Placing commissions / capital markets

58,822

51,000

-13%

Corporate broking and advisory

88,587

81,200

-8%

Total revenue

136,047

124,900

-8%

Source: Edison Investment Research

As noted earlier, the balance sheet remains strong with net cash of £111.7m, an increase of £15.8m during the year partly arising from the realisation of the investment in the Numis Mid Cap fund. Including this realisation (£12.5m), overall cash generated from operations amounted to nearly £46m and principal uses of cash were share buybacks (£16.3m) and dividend payments (£12.8m). Shareholders’ funds were £143m and, less the final dividend declared (£6.9m), qualifying capital is £136m which Numis reports is more than twice the regulatory requirement leaving a surplus in excess of £68m. The headroom in terms of capital and liquidity provides a valuable cushion in varying market conditions and is helpful in supporting market making, facilitating client trading and securing some equity capital markets transactions.

Valuation

We start with our comparative valuation table which includes UK brokers together with a selection of US and European investment banks and advisory firms. The absence of published estimates for some other UK brokers explains the gaps in current year P/Es in the comparison. While the businesses have different profiles they do constitute a broadly related peer group. In terms of P/Es (calculated on last reported earnings), the Numis multiple is slightly below the average across the whole list (11.9x), while its above-average current year P/E should probably be seen in the context of the estimate reduction we have put in place and the potential for other estimates to be adjusted in due course as companies provide their next trading updates. Numis trades on an above-average price to book ratio but this is supported by the above-average historical return on equity.

Exhibit 15: 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

255

274

11.1

15.2

4.7

19.3

1.9

Arden

27

8

Loss

N/A

0.0

N/A

0.9

Cenkos

70

38

5.3

N/A

5.8

25.3

1.4

Shore Capital

205

44

16.0

17.9

4.9

4.8

0.8

WH Ireland

65

21

Loss

N/A

0.0

N/A

1.8

UK brokers average

10.8

16.5

3.1

16.5

1.4

US, European IB and advisory

Bank of America

25.8

252,814

13.9

10.1

1.5

7.9

1.1

Evercore

79.1

3,755

14.5

10.9

1.8

51.6

5.7

Goldman Sachs

176.5

65,642

8.9

7.1

1.6

11.1

0.8

Greenhill

26.7

548

N/A

N/A

5.2

-4.5

3.5

JP Morgan

100.4

333,871

14.4

10.9

2.0

9.9

1.3

Moelis

37.1

2,086

16.2

12.7

4.0

54.2

3.8

Morgan Stanley

41.7

71,799

11.6

8.6

2.2

9.4

1.1

Stifel Financial

45.0

3,243

11.3

8.7

0.4

11.9

1.1

Credit Suisse

11.6

29,547

13.6

11.4

2.2

4.3

0.7

Deutsche Bank

7.5

15,459

8.0

20.5

1.5

2.9

0.2

UBS

12.9

49,661

9.4

9.4

5.0

10.0

0.9

US, European IB and advisory average

12.2

11.0

2.5

15.3

1.8

Source: Thomson Reuters. Note: Priced at 10 January 2019, P/Es are for financial years therefore not all same period end.

Exhibit 16 shows the history of the price to book ratio over the last five years showing how the recent price correction has pulled the ratio below its five-year average (2.4x). If we extend the period to 10 years, including the impact from the financial crisis, when Numis traded close to book value, the average value falls to 1.9x: still in line with rather than below the current value.

Exhibit 16: Five-year history of the price to book value ratio for Numis

Source: Thomson Datastream, Edison Investment Research

As previously, we have used a ROE/COE valuation model to infer the ROE assumption required to match the 255p share price at time of writing: this gives a value of 15.4% (based on the FY18 NAV of 135p and assuming a cost of equity of 10% and growth of 4%). Our current forecast indicates an ROE of 14% for FY19 but on a medium-term view, with a return to more favourable market conditions and as benefits from the investment in staff flow through, a return in line with or above the five-year historical average of 20% appears well within reach. The sensitivity of the valuation to changing growth and ROE assumptions is illustrated in Exhibit 17.

Exhibit 17: ROE/COE valuation output variations (value per share, p)

Growth rate (right)
Return on equity

2.0%

3.0%

4.0%

5.0%

6.0%

10%

135

135

135

135

135

12%

169

174

180

189

203

15%

219

231

248

270

304

18%

270

289

315

351

405

20%

304

328

360

405

473

Source: Edison Investment Research

Finally, for reference we have included a table summarising the recent share price performance of the peer group stocks. While there is divergence between the individual stocks, all have experienced negative movements over three months and one year and all have seen significant reductions from their 12-month highs, reflecting the more recent increase in market volatility. On average the UK stocks have been weaker than the US and European investment banks and advisory firms. Numis shares have generally performed in line with or modestly better than its UK peers.

Exhibit 18: Recent share price performance comparison

One month

Three months

One year

YTD

From 12m high

UK brokers

Numis

-2.3

-17.5

-22.7

6.5

-43.2

Arden Partners

-11.5

-19.4

-49.5

-5.3

-51.5

Cenkos

11.2

-11.5

-40.1

-3.5

-43.2

Shore Capital

-9.7

-21.2

-1.4

-4.7

-32.8

WH Ireland

9.2

-30.9

-49.0

-3.7

-58.3

UK brokers average

-0.6

-20.1

-32.6

-2.1

-45.8

US, European IB and advisory

Bank of America

1.3

-14.1

-14.9

4.5

-22.1

Evercore

3.0

-15.8

-16.0

10.6

-32.6

Goldman Sachs

-1.8

-20.8

-30.5

5.6

-35.9

Greenhill

7.0

-4.3

39.9

9.5

-20.1

JP Morgan

-2.8

-12.3

-7.9

2.8

-15.9

Moelis

-4.1

-30.5

-20.8

7.9

-43.8

Morgan Stanley

1.0

-9.6

-21.7

5.3

-29.7

Stifel Financial

-0.7

-12.1

-31.1

8.7

-34.5

Credit Suisse

6.9

-16.5

-35.2

7.0

-38.5

Deutsche Bank

2.8

-21.9

-51.9

7.4

-53.9

UBS

5.9

-12.1

-30.7

5.3

-34.8

US, European IB and advisory average

1.7

-15.5

-20.1

6.8

-32.9

Source: Thomson Reuters, Edison Investment Research. Note: Priced at 10 January 2019.

Exhibit 19: Financial summary

£'000s

2015

2016

2017

2018

2019e

Year end 30 September

PROFIT & LOSS

Revenue

 

 

97,985

112,335

130,095

136,047

124,900

Administrative expenses (excl. amortisation and depreciation)

(65,018)

(76,120)

(83,626)

(94,603)

(88,338)

Share based payment

(4,104)

(6,229)

(10,454)

(10,583)

(10,600)

EBITDA

 

 

28,863

29,986

36,015

30,861

25,962

Depreciation

 

 

(882)

(1,126)

(1,226)

(1,113)

(1,200)

Amortisation

(111)

(125)

(89)

(49)

(50)

Operating Profit (before amort. and except).

 

 

27,870

28,735

34,700

29,699

24,712

Net finance income

190

37

188

212

210

Other operating income

(1,978)

3,759

3,431

1,733

500

Profit before tax

 

 

26,082

32,531

38,319

31,644

25,422

Tax

(4,533)

(6,132)

(7,942)

(4,967)

(4,864)

Profit after tax (FRS 3)

 

 

21,549

26,399

30,377

26,677

20,558

Average diluted number of shares outstanding (m)

117.6

118.0

117.2

115.8

114.1

EPS - basic (p)

19.5

23.5

27.4

25.1

19.6

EPS - diluted (p)

 

 

18.3

22.4

25.9

23.0

18.0

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

138.8

ROE (%)

19%

22%

23%

19%

14%

EBITDA margin (%)

29.5%

26.7%

27.7%

22.7%

20.8%

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

28.4%

25.6%

26.7%

21.8%

19.8%

BALANCE SHEET

Fixed assets

 

 

6,724

5,522

6,147

8,215

7,565

Current assets

 

 

279,114

312,462

407,850

533,033

534,159

Total assets

 

 

285,838

317,984

413,997

541,248

541,724

Current liabilities

 

 

(170,319)

(188,895)

(280,371)

(398,112)

(398,112)

Long term liabilities

0

(12)

0

0

0

Net assets

 

 

115,519

129,077

133,626

143,136

143,612

CASH FLOW

Operating cash flow

 

 

6,467

48,735

43,369

45,830

27,018

Net cash from investing activities

(3,632)

84

(198)

(1,014)

(210)

Net cash from (used in) financing

(17,510)

(19,580)

(36,359)

(29,035)

(30,682)

Net cash flow

 

 

(14,675)

29,239

6,812

15,781

(3,874)

Opening net (cash)/debt

 

 

(74,518)

(59,591)

(89,002)

(95,852)

(111,673)

FX effect

 

 

(252)

172

38

40

0

Closing net (cash)/debt

 

 

(59,591)

(89,002)

(95,852)

(111,673)

(107,799)

Source: Company data, Edison Investment Research

Contact details

Revenue by geography

The London Stock Exchange Building,
10 Paternoster Square,
London, UK
EC4M 7LT
+44 (0)20 7260 1000
www.numiscorp.com

Contact details

The London Stock Exchange Building,
10 Paternoster Square,
London, UK
EC4M 7LT
+44 (0)20 7260 1000
www.numiscorp.com

Revenue by geography

Management team

Co-CEO: Alex Ham

Co-CEO: Ross Mitchinson

Alex, together with Ross Mitchinson, is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Alex joined Numis in August 2005 and after a short stint as an equity research analyst, joined the corporate broking team where he played a critical role in building and developing Numis’s retained corporate client base and equity capital markets capability. He was appointed head of corporate broking & advisory in May 2015 and co-CEO in September 2016.

Ross is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Ross joined Numis in October 2008 and was appointed head of sales in 2014 and head of equities in 2015. He has been a board member of NSL since 2012. Ross held positions at both UBS and Kaupthing Singer & Friedlander prior to joining Numis.

Chief Financial Officer: Andrew Holloway

Andrew was appointed as CFO in January 2018. He joined Numis in 2009 and played a prominent role in the development of the firm’s corporate broking and advisory department, gaining a varied experience in serving many of Numis’s financial services sector corporate clients. He is a qualified chartered accountant and before joining Numis was a member of the UK corporate finance team at Dresdner Kleinwort.

Management team

Co-CEO: Alex Ham

Alex, together with Ross Mitchinson, is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Alex joined Numis in August 2005 and after a short stint as an equity research analyst, joined the corporate broking team where he played a critical role in building and developing Numis’s retained corporate client base and equity capital markets capability. He was appointed head of corporate broking & advisory in May 2015 and co-CEO in September 2016.

Co-CEO: Ross Mitchinson

Ross is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Ross joined Numis in October 2008 and was appointed head of sales in 2014 and head of equities in 2015. He has been a board member of NSL since 2012. Ross held positions at both UBS and Kaupthing Singer & Friedlander prior to joining Numis.

Chief Financial Officer: Andrew Holloway

Andrew was appointed as CFO in January 2018. He joined Numis in 2009 and played a prominent role in the development of the firm’s corporate broking and advisory department, gaining a varied experience in serving many of Numis’s financial services sector corporate clients. He is a qualified chartered accountant and before joining Numis was a member of the UK corporate finance team at Dresdner Kleinwort.

Principal shareholders

(%)

Aktieselskabet AF 1.3.2017 (Anders Holch Povlsen)

21.5

Aviva

6.3

Barclays

6.3

Marcus Chorley

3.5

Michael Spencer

3.4

Janus Henderson

3.4

GVQ

3.2

CI Investments

2.9

Companies named in this report

Cenkos (CNKS), Shore Capital Group (SGR), Arden Partners (ARDN), WH Ireland (WHI)


General disclaimer and copyright

This report has been commissioned by Numis Corporation and prepared and issued by Edison, in consideration of a fee payable by Numis Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Numis Corporation and prepared and issued by Edison, in consideration of a fee payable by Numis Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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