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Research: Financials
Numis expects to report H120 revenues c 10% higher than in H119 with revenue from investment banking slightly down and equities ahead on the back of increased market volatility. Given the impact of the pandemic we have provided indicative scenarios rather than a point estimate for FY20. Numis is strongly capitalised and has net cash of over £84m. Looking beyond the current dislocation, it is well positioned to serve its corporate client base in a period in which the need for fresh equity and a revival in corporate transactions could drive a sharp recovery in activity.
Written by
Numis Corporation |
Sound H120 and opportunity post COVID-19 |
H120 trading update |
Financial services |
3 April 2020 |
Share price performance
Business description
Next events
Analysts
Numis Corporation is a research client of Edison Investment Research Limited |
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Numis expects to report H120 revenues c 10% higher than in H119 with revenue from investment banking slightly down and equities ahead on the back of increased market volatility. Given the impact of the pandemic we have provided indicative scenarios rather than a point estimate for FY20. Numis is strongly capitalised and has net cash of over £84m. Looking beyond the current dislocation, it is well positioned to serve its corporate client base in a period in which the need for fresh equity and a revival in corporate transactions could drive a sharp recovery in activity.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
8.3 |
5.6 |
09/18 |
136.0 |
31.6 |
23.0 |
12.0 |
9.4 |
5.6 |
09/19 |
111.6 |
12.4 |
8.1 |
12.0 |
26.6 |
5.6 |
09/20 mid-scenario** |
125.5 |
19.4 |
13.9 |
12.0 |
15.6 |
5.6 |
Note: *PBT and EPS are on a reported basis and EPS is fully diluted. **Figures shown are for a mid-point in a range of scenarios: see Exhibit 6.
H120 trading update
Numis’s first half saw significant changes in market background including as it did uncertainty ahead of the pre-Brexit general election, a brief revival of corporate activity subsequently and then the escalating global impact of COVID-19. For the Investment Banking business this restricted the opportunity to complete deals and revenue was just below the H119 level. Transactions included fund-raisings for Bovis Homes, Future, Hyve and International Public Partnerships together with an advisory role to Unite in a £1.4bn acquisition; there was also an unnamed private fintech transaction. The Equities business was markedly stronger benefiting from a post-election and volatility-driven increase in trading activity. The trading book also performed well and was not held back by the loss on the Kier rights that affected H119. Overall, as noted above, H120 revenue is expected to be c 10% ahead of H119.
Background and outlook
The rapid evolution of the pandemic and government responses suggest that a point estimate for FY20 is not appropriate and overleaf we set out illustrative scenarios for FY20 revenues, profits and earnings per share for reference. Drivers to consider for investment banking include when and how rapidly there will be a revival in corporate activity and the degree to which there will be new equity issuance to support balance sheets. On the equities side of the business, trading volumes remain at a high level but there could be a quiet period following elevated volatility.
Valuation: Below historical price to book
The shares are currently trading on a price to book ratio of c 1.6x compared to a 10-year average of 1.9x. The return on equity is likely to be relatively depressed this year (our scenarios range from 5% to 14%) and a return to the longer-term average of 18% would warrant a higher book multiple.
Background
In this section we show a long-term history for London Stock Exchange equity trading activity and fund-raising and UK M&A activity to provide a context for the current situation.
The first chart shows the average daily value traded on the London Stock Exchange Main Market order book. This highlights the increased level of trading that Numis references in its trading statement. Looking back to the period around the financial crisis, the period of elevated volatility and activity was quite extended before subsiding to the lower level that prevailed for 10 years.
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Exhibit 1: LSE order book, average daily value traded |
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Source: London Stock Exchange (Main Market) |
The next two charts show Main Market and AIM equity fund-raising and the number of new issues. Unsurprisingly, recent fund-raising has been subdued, particularly on the AIM market. The level of new and further issues appears likely to remain limited while current levels of uncertainty persist. However, once market confidence begins to return there could be high levels of issuance as companies seek to strengthen balances sheets or revive corporate plans put on hold.
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Exhibit 2: Main market money raised and new issues |
Exhibit 3: AIM money raised and new issues |
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Source: London Stock Exchange |
Source: London Stock Exchange |
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Exhibit 2: Main market money raised and new issues |
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Source: London Stock Exchange |
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Exhibit 3: AIM money raised and new issues |
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Source: London Stock Exchange |
Finally, looking at M&A activity, Exhibits 4 and 5 show UK M&A activity since 2007 and, on a quarterly basis, since 2018. Transaction numbers and value had already reduced in 2019 and, as with equity issuance, look set to decline significantly with the onset of the current crisis. Some planned transactions may well be permanently discarded in light of industry changes and the macroeconomic situation but other opportunities are also likely to open up once corporate activity returns, potentially creating a very busy period for Numis’s Investment Banking business.
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Exhibit 4: UK M&A transaction value 2007–19 |
Exhibit 5: UK M&A value and volume 2018 and 2019 |
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Source: ONS. Note: Total of inbound, outbound and domestic. |
Source: ONS, Edison Investment Research |
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Exhibit 4: UK M&A transaction value 2007–19 |
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Source: ONS. Note: Total of inbound, outbound and domestic. |
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Exhibit 5: UK M&A value and volume 2018 and 2019 |
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Source: ONS, Edison Investment Research |
Financials
As noted on the first page, the uncertainty of the current market background means that we are showing a range of potential outcomes in place of a point forecast for FY20. Our scenario analysis is set out in Exhibit 6. As far as revenue is concerned the H120 trading statement points to a first half figure of c £61m (H119: £55.7m). The full year outcome will depend on the degree to which the strength in Equities is maintained and whether there is window for strengthening in Investment Banking activity before the September year end. Revenues for our scenarios are similar to those shown in our December note reflecting the resilient performance seen in the first half. Note that for the other operating income line we have assumed a neutral position (no positive or negative impact from the investment portfolio) and there would appear to be some downside risk here. Conservatively we have allowed for somewhat higher cost ratios (mid-scenario values are similar to FY19) and earnings as a result are c 8% lower than previously shown. Further details of the middle scenario are shown in the financial summary (Exhibit 8).
Exhibit 6: Illustrative scenario analysis for FY20
£m unless stated |
Lower |
Mid |
Higher |
Revenue |
108.5 |
125.5 |
134.0 |
Other operating income (investment portfolio) |
0.0 |
0.0 |
0.0 |
Total income |
108.5 |
125.5 |
134.0 |
Non-staff costs* |
(35.6) |
(35.6) |
(35.6) |
Staff costs |
(65.1) |
(71.1) |
(74.4) |
Operating profit |
7.8 |
18.8 |
24.0 |
Net finance income |
0.6 |
0.6 |
0.6 |
Pre-tax profit |
8.3 |
19.4 |
24.5 |
Tax |
(1.6) |
(3.7) |
(4.7) |
Net profit |
6.7 |
15.7 |
19.9 |
EPS (p) |
6.0 |
13.9 |
17.6 |
DPS (p) |
12.0 |
12.0 |
12.0 |
Return on equity |
5% |
11% |
14% |
Total cost/revenue |
93% |
85% |
82% |
Total staff cost/revenue |
60% |
57% |
56% |
Source: Edison Investment Research. *Note: non-staff costs include an assumed c £2m of one-off costs related to London office move.
As a reminder, on non-staff costs we have allowed for a modest underlying increase but added approaching £2m for potential one-off costs associated with the move to a new London office with the lease beginning near the end of FY20 and relocation expected to take place in H221. Disruption related to COVID-19 may affect these timings. The 50,000 square foot office will be c 60% larger than the existing one, providing capacity for growth over the term of the 15-year lease. Including the effect of implementation of IFRS 16, Numis expects this will increase ongoing costs from FY21 by £3m. In addition to this there will be fitout costs that we estimate could be in the region of £7–9m (based on a Cushman and Wakefield cost report). These costs will be amortised over the lease term (c £0.6m pa) and in cash terms would be broadly balanced by the benefit of a three-year rent-free period (we estimate c £9m in total).
Numis remains financially strong with no debt drawn and cash and cash equivalents above the year-end level of £84.2m.
Valuation
Given the substantial uncertainties surrounding estimates we focus on price to book value as a valuation measure at this point. Exhibit 7 shows where this stands relative to a 10-year history with a current value of 1.6x compared with an average of c 1.9x.
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Exhibit 7: 10-year history of the price to book value ratio for Numis |
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Source: Refinitiv, Edison Investment Research |
We use an ROE/COE valuation model to infer the ROE assumption required to match the 216p share price at time of writing: this gives a value of 13.9% (based on the FY19 NAV of 132p and assuming a cost of equity of 10% and growth of 4%). Our scenarios show ROEs between 5% and 14% for FY20, but on a medium-term view, with a return to more favourable market conditions and as benefits from the investment in staff made in FY18 are realised, a return in line with or above the five-year historical average of 18% still does not appear an unrealistic outcome in subsequent years.
Exhibit 8: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
Mid scenario 2020e |
Year end 30 September |
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PROFIT & LOSS |
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Revenue |
97,985 |
112,335 |
130,095 |
136,047 |
111,610 |
125,525 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(94,603) |
(85,432) |
(93,600) |
Share based payment |
(4,104) |
(6,229) |
(10,454) |
(10,583) |
(10,914) |
(12,000) |
EBITDA |
28,863 |
29,986 |
36,015 |
30,861 |
15,264 |
19,925 |
Depreciation |
(882) |
(1,126) |
(1,226) |
(1,113) |
(1,124) |
(1,100) |
Amortisation |
(111) |
(125) |
(89) |
(49) |
(44) |
(30) |
Operating Profit (before amort. and except). |
27,870 |
28,735 |
34,700 |
29,699 |
14,096 |
18,795 |
Net finance income |
190 |
37 |
188 |
212 |
550 |
560 |
Other operating income |
(1,978) |
3,759 |
3,431 |
1,733 |
(2,210) |
0 |
Profit before tax |
26,082 |
32,531 |
38,319 |
31,644 |
12,436 |
19,355 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(4,967) |
(3,110) |
(3,677) |
Profit after tax (FRS 3) |
21,549 |
26,399 |
30,377 |
26,677 |
9,326 |
15,678 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
115.8 |
114.8 |
113.2 |
EPS - basic (p) |
19.5 |
23.5 |
27.4 |
25.1 |
8.8 |
15.1 |
EPS - diluted (p) |
18.3 |
22.4 |
25.9 |
23.0 |
8.1 |
13.9 |
Dividend per share (p) |
11.50 |
12.00 |
12.00 |
12.00 |
12.00 |
12.00 |
NAV per share (p) |
102.0 |
113.5 |
125.0 |
135.0 |
131.7 |
133.1 |
ROE (%) |
19% |
22% |
23% |
19% |
6.6% |
11.4% |
EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
22.7% |
13.7% |
15.9% |
Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
21.8% |
12.6% |
15.0% |
BALANCE SHEET |
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Fixed assets |
6,724 |
5,522 |
6,147 |
8,215 |
6,832 |
6,202 |
Current assets |
279,114 |
312,462 |
407,850 |
533,033 |
326,641 |
326,690 |
Total assets |
285,838 |
317,984 |
413,997 |
541,248 |
333,473 |
332,892 |
Current liabilities |
(170,319) |
(188,895) |
(280,371) |
(398,112) |
(195,319) |
(195,319) |
Long term liabilities |
0 |
(12) |
0 |
0 |
0 |
0 |
Net assets |
115,519 |
129,077 |
133,626 |
143,136 |
138,154 |
137,573 |
CASH FLOW |
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Operating cash flow |
6,467 |
48,735 |
43,369 |
45,830 |
(2,748) |
28,108 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(1,014) |
(77) |
200 |
Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(29,035) |
(24,646) |
(28,258) |
Net cash flow |
(14,675) |
29,239 |
6,812 |
15,781 |
(27,471) |
49 |
Opening net (cash)/debt |
(74,518) |
(59,591) |
(89,002) |
(95,852) |
(111,673) |
(84,202) |
FX effect |
(252) |
172 |
38 |
40 |
0 |
0 |
Closing net (cash)/debt |
(59,591) |
(89,002) |
(95,852) |
(111,673) |
(84,202) |
(84,251) |
Source: Company data, Edison Investment Research
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