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Research: Financials
Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
Written by
Numis Corporation |
An encouraging update |
Q320 update |
Financial services |
7 July 2020 |
Share price performance
Business description
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Numis Corporation is a research client of Edison Investment Research Limited |
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Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
12.1 |
3.8 |
09/18 |
136.0 |
31.6 |
23.0 |
12.0 |
13.6 |
3.8 |
09/19 |
111.6 |
12.4 |
8.1 |
12.0 |
38.7 |
3.8 |
09/20e |
135.0 |
24.6 |
17.5 |
12.0 |
18.0 |
3.8 |
Note: *PBT and EPS are on a reported basis and EPS is fully diluted.
Q320 update confirms increased activity
In its update for the three months to end June (Q320) Numis reported that revenues were materially ahead of both Q120 and Q220. Both Investment Banking and Equities performed well. Within Investment Banking, IPO and M&A activity remained at very low levels and the driver has been an increased number of capital markets transactions as companies strengthen balance sheets. Among more than 100 transactions raising c £14.5bn in the period, examples included capital raisings for ASOS (£247m), Beazley (£247m), Ocado (£657m) and Unite (£300m). On the Equities side of the business, trading volumes subsided from the peak seen with the onset of COVID-19, but this was more than offset by a continuation of the strong trading gains from the first half.
Background and outlook
London Stock Exchange data shows a substantial pick up in capital raisings over the last three months (see Exhibits 3 and 4) while the number of new issues remains subdued. The group reports a good pipeline of transactions and, subject to the market background in the final quarter, looks for second half revenues and profits to be ahead of the first half. Given the uncertain background, we had previously shown a range of scenarios rather than a point estimate for FY20, but, following the update, have adopted the high scenario (with revenue of £135m) as our estimate, noting that the outcome could be higher if the market background facilitates a continued strong pace of transactions.
Valuation
Numis shares have responded to higher levels of transactions and trade on a price to book multiple of 2.4x, above the 10-year average of 2.0x but still well below peak levels of around 3.0x during this period. From another perspective, based on a ROE/COE model, the current share price implies a market assumption that Numis can attain a sustainable return on equity of between 18% and 19%. This is above our current year estimate (14%) but in line with a five-year historical average.
Background and outlook
The first chart (Exhibit 1) shows how LSE order book volumes spiked with the onset of COVID-19 but have subsequently reverted closer to prior levels. Exhibit 2 illustrates the sharp fall and bounce back seen in UK equity indices in recent months. Calendar year-to-date, AIM issuers (CBOE Alternative UK 100) are down 6% while the CBOE All-Companies and Small Companies indices are down c 23% and 29%, respectively. Further volatility in index levels, potentially accompanied by higher trading activity, may well be seen as news related to COVID-19 and macroeconomic developments emerges.
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Exhibit 1: LSE order book, average daily value traded |
Exhibit 2: UK equity indices |
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Source: London Stock Exchange (Main Market) |
Source: Refinitiv, CBOE indices |
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Exhibit 1: LSE order book, average daily value traded |
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Source: London Stock Exchange (Main Market) |
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Exhibit 2: UK equity indices |
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Source: Refinitiv, CBOE indices |
These developments are also set to influence the pace of equity market fund-raising. The next two charts look at trends in equity issuance on the London Stock Exchange Main and AIM markets. Money raised was relatively subdued last year, particularly on AIM. Both markets have seen a marked increase in further issuance in the last four months as companies have issued equity to recapitalise their balance sheets. The Q320 update demonstrated that Numis has played a full part in this activity.
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Exhibit 3: Main Market money raised, new and further |
Exhibit 4: AIM money raised, new and further |
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Source: London Stock Exchange |
Source: London Stock Exchange |
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Exhibit 3: Main Market money raised, new and further |
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Source: London Stock Exchange |
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Exhibit 4: AIM money raised, new and further |
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Source: London Stock Exchange |
Numis reports a strong transaction pipeline but we note that at some point there could be a pause in capital markets transaction volume between the current phase of activity and the resumption of a more normal period of transactions as the crisis eases. Even so, Numis has demonstrated the strength of its franchise, which together with a strong balance sheet (end H120 cash stood at £95m) should allow it to exploit opportunities as they emerge.
Financials: New estimate for FY20
Our new estimates for FY20 are in line with the high scenario in the range that we set out in our last note in May. To put this in context, we show key numbers for our new estimates compared with the previous mid-range scenario in Exhibit 5. Further details are shown in the financial summary (Exhibit 7).
Exhibit 5: New FY20 estimate compared with prior mid-range scenario
£m unless stated |
Previous mid-range scenario |
New FY20e |
Revenue |
125.3 |
135.0 |
Other operating income (investment portfolio) |
(1.9) |
(1.9) |
Total income |
123.4 |
133.1 |
Non staff costs |
(34.0) |
(34.0) |
Staff costs |
(72.6) |
(74.6) |
Operating profit |
16.8 |
24.5 |
Net finance income |
0.1 |
0.1 |
Pre-tax profit |
16.9 |
24.6 |
Tax |
(3.2) |
(4.7) |
Net profit |
13.7 |
19.9 |
EPS, diluted (p) |
12.0 |
17.5 |
DPS (p) |
12.0 |
12.0 |
Return on equity |
10% |
14% |
Total cost/revenue |
85% |
80% |
Total staff cost/revenue |
58% |
55% |
Source: Edison Investment Research
Valuation
Given significant uncertainties surrounding the trading outlook for Numis and its peers we continue to focus on price to book value as a valuation measure at this point. Reflecting the high number of capital market transactions being undertaken, Numis shares have bounced back strongly from their recent low of 167p in March and year-to-date are up nearly 5%. They trade on 2.4x book value compared with a 10-year average of 2.0x and a five-year average of 2.2x. Using an ROE/COE model, the share price at time of writing implies the market is assuming a sustainable ROE of between 18% and 19%; this is above the 14% that our FY20 estimate suggests but similar to the five-year historical average.
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Exhibit 6: 10-year history of the price to book value ratio for Numis |
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Source: Refinitiv, Edison Investment Research |
Exhibit 7: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
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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 |
135,000 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(94,603) |
(85,432) |
(95,358) |
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Share based payment |
(4,104) |
(6,229) |
(10,454) |
(10,583) |
(10,914) |
(10,250) |
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EBITDA |
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|
28,863 |
29,986 |
36,015 |
30,861 |
15,264 |
29,392 |
Depreciation |
|
|
(882) |
(1,126) |
(1,226) |
(1,113) |
(1,124) |
(2,894) |
Amortisation |
(111) |
(125) |
(89) |
(49) |
(44) |
(95) |
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Operating Profit |
|
|
27,870 |
28,735 |
34,700 |
29,699 |
14,096 |
26,403 |
Net finance income |
190 |
37 |
188 |
212 |
550 |
60 |
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Other operating income |
(1,978) |
3,759 |
3,431 |
1,733 |
(2,210) |
(1,904) |
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Profit before tax |
|
|
26,082 |
32,531 |
38,319 |
31,644 |
12,436 |
24,559 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(4,967) |
(3,110) |
(4,666) |
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Profit after tax (FRS 3) |
|
|
21,549 |
26,399 |
30,377 |
26,677 |
9,326 |
19,893 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
115.8 |
114.9 |
114.0 |
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EPS - basic (p) |
19.5 |
23.5 |
27.4 |
25.1 |
8.8 |
18.9 |
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EPS - diluted (p) |
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|
18.3 |
22.4 |
25.9 |
23.0 |
8.1 |
17.5 |
Dividend per share (p) |
11.50 |
12.00 |
12.00 |
12.00 |
12.00 |
12.00 |
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NAV per share (p) |
102.0 |
113.5 |
125.0 |
135.0 |
131.7 |
135.2 |
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ROE (%) |
19% |
22% |
23% |
19% |
6.6% |
14.2% |
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EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
22.7% |
13.7% |
21.8% |
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Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
21.8% |
12.6% |
19.6% |
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BALANCE SHEET |
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Fixed assets |
|
|
6,724 |
5,522 |
6,147 |
8,215 |
6,832 |
9,671 |
Current assets |
|
|
279,114 |
312,462 |
407,850 |
533,033 |
326,641 |
384,773 |
Total assets |
|
|
285,838 |
317,984 |
413,997 |
541,248 |
333,473 |
394,444 |
Current liabilities |
|
|
(170,319) |
(188,895) |
(280,371) |
(398,112) |
(195,319) |
(248,940) |
Long term liabilities |
0 |
(12) |
0 |
0 |
0 |
(2,736) |
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Net assets |
|
|
115,519 |
129,077 |
133,626 |
143,136 |
138,154 |
142,768 |
CASH FLOW |
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Operating cash flow |
|
|
6,467 |
48,735 |
43,369 |
45,830 |
(2,748) |
42,483 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(1,014) |
(77) |
151 |
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Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(29,035) |
(24,646) |
(26,967) |
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Net cash flow |
|
|
(14,675) |
29,239 |
6,812 |
15,781 |
(27,471) |
17,391 |
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) |
(101,593) |
Source: Numis accounts, Edison Investment Research
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Research: Healthcare
Hutchison China MediTech (HCM) is on the brink of global launches of two assets from its internally developed oncology portfolio. In 2022 we expect US launches of surufatinib (broad NET indication) two years earlier than forecast as well as savolitinib (NSCLC). Recently the FDA granted fast-track designation to fruquintinib in mCRC and we forecast global launch in 2023. In China, HCM has laid the foundations to capitalize on the slew of additional novel oncology drugs (expected by end 2021). HCM is well funded (following the recent $100m equity investment from General Atlantic, plus warrants granted for an additional $100m in 18 months) as it accelerates the global development of its unpartnered assets and expands its global commercial outreach. Beyond 2024 we expect sustainable profitability and margin expansion. Our increased valuation is $6.3bn.