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Market capitalisation
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Research: Financials
Numis has adapted well to the rapid change in operating requirements, substantial market volatility and changes in the nature of its transaction pipeline. The near-term trading environment seems positive in the circumstances with recapitalisation fund-raisings for clients and good levels of institutional activity buoying performance. The outlook beyond this is less clear but the strength of the Numis franchise and balance sheet is encouraging for the longer term.
Written by
Numis Corporation |
Busy and adapting to new circumstances |
H120 results |
Financial services |
15 May 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 has adapted well to the rapid change in operating requirements, substantial market volatility and changes in the nature of its transaction pipeline. The near-term trading environment seems positive in the circumstances with recapitalisation fund-raisings for clients and good levels of institutional activity buoying performance. The outlook beyond this is less clear but the strength of the Numis franchise and balance sheet is encouraging for the longer term.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
10.8 |
4.3 |
09/18 |
136.0 |
31.6 |
23.0 |
12.0 |
12.2 |
4.3 |
09/19 |
111.6 |
12.4 |
8.1 |
12.0 |
34.5 |
4.3 |
09/20 mid-scenario** |
125.3 |
16.9 |
12.0 |
12.0 |
23.4 |
4.3 |
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 7
H120 results: Equities strength drives revenue
H120 revenue was 13% up y-o-y to £63.1m, slightly ahead of the c 10% indicated in the March period-end trading update. The Investment Banking business had a limited window for activity following the general election and before the onset of COVID-19. As a result its revenues were down 5%. In contrast the Equities business recorded revenues up 55% within which Institutional revenue was up 19% and profitability on the trading book was strong compared with a weak H119 (£6.5m against £0.4m). There was a 13% or £1.9m write-down on the investment portfolio. This, with somewhat higher costs than we had allowed (the compensation ratio was 58.6% versus 54.2% for H119 and 57.8%, FY19), left pre-tax profit at £7.3m versus £7.1m for H119. Basic EPS was 6.0p versus 5.4p. The interim dividend is maintained at 5.5p reflecting a commitment to a stable dividend. The balance sheet remains strong with cash up from £84.2m at the year end to £95.3m and a significant excess of capital for regulatory purposes.
Background and outlook
Given the uncertainty created by the pandemic we continue to set out illustrative scenarios for FY20 revenues, profits and earnings per share rather than a point estimate. On the equities side of the business, trading volumes remain at a high level but there could be a quiet period following the currently elevated volatility. Similarly, investment banking is currently trading well but could suffer a pause at some point between recapitalisation activity and a revival in other types of corporate transaction.
Valuation
The shares trade on a book multiple of over 2x which, on our ROE/COE model, would be consistent with an assumed sustainable return on equity (ROE) of 17%. This therefore appears to discount part of a potential profit recovery but can be viewed in the context of a five-year historical average ROE of 18% and the investment in staff undertaken in 2018 to underpin future growth.
H120 results
An analysis of the profit and loss figures for the last three half year periods is given in Exhibit 1. Key points from the H120 results included the following, with changes against H119 unless stated:
■
Overall revenue increased by 13%, within which Investment banking was down 5%, the result of a relatively difficult background for both capital markets and advisory activities where IPOs, M&A and other corporate transactions were muted. Corporate retainers, a more stable source of revenue, were up even though the number of corporate clients fell (209 versus 214) reflecting normal attrition and Numis proactively rotating the client base towards companies expected to be active (the average market capitalisation of new clients was five times that of those lost). Within Equities the change in profitability was accentuated by the £3m loss incurred in relation to the Kier rights issue in H119. Institutional income benefited from increased activity following the general election and recent market volatility.
■
Total administrative costs increased by 14% including a 23% increase in staff costs driven primarily by variable compensation and there was a small reduction in other costs. The compensation/revenue ratio was 58.6% versus 54.2% (and 57.8% FY19) and remains within the target range of 50–60%.
■
Operating profit before other operating income was up 12% to £9.1m with the margin nearly maintained at 14.5%.
■
There was a 13% or £1.9m write-down, shown as other operating income, on the (mainly private) investment portfolio leaving its value at £13m.
■
After this write-down pre-tax profit was up 2% at £7.3m and diluted EPS, after a lower tax charge, increased 11% to 5.5p.
■
The group maintained its commitment to a stable dividend across market cycles, announcing an unchanged interim payment of 5.5p.
Exhibit 1: P&L analysis
Year-end September |
H119 |
H219 |
H120 |
Change H120/H119 (%) |
Net trading gains |
0.4 |
3.6 |
6.5 |
N/A |
Institutional income |
16.5 |
16.8 |
19.7 |
19.2 |
Equities |
16.9 |
20.5 |
26.2 |
55.5 |
Corporate retainers |
6.4 |
6.9 |
6.8 |
6.0 |
Advisory |
7.5 |
5.0 |
7.2 |
(4.2) |
Capital markets |
24.9 |
23.5 |
22.8 |
(8.1) |
Investment banking |
38.8 |
35.5 |
36.9 |
(5.0) |
Total revenue |
55.7 |
55.9 |
63.1 |
13.3 |
Other operating income |
(1.4) |
(0.8) |
(1.9) |
33.3 |
Total income |
54.3 |
55.1 |
61.2 |
12.8 |
Staff costs |
(30.2) |
(34.3) |
(37.0) |
22.5 |
Non-staff costs |
(17.4) |
(15.6) |
(17.0) |
(2.3) |
Total administrative expenses |
(47.6) |
(49.9) |
(54.0) |
13.5 |
Operating profit / loss |
6.7 |
5.2 |
7.2 |
8.0 |
Finance income/expense |
0.4 |
0.1 |
0.0 |
(92.8) |
Pre-tax profit |
7.1 |
5.3 |
7.3 |
2.1 |
Tax |
(1.4) |
(1.7) |
(1.0) |
(28.2) |
Effective tax rate (%) |
19.6 |
32.2 |
13.8 |
|
Attributable profit |
5.7 |
3.6 |
6.3 |
9.5 |
Diluted EPS (p) |
5.0 |
3.1 |
5.5 |
11.2 |
Dividend (p) |
5.5 |
6.5 |
5.5 |
0.0 |
Operating profit before other income |
8.1 |
6.0 |
9.1 |
12.4 |
Operating margin before other income (%) |
14.6 |
10.7 |
14.5 |
Source: Numis, Edison Investment Research
The end-March headcount was modestly higher at 285 (+2% y-o-y) with hiring focused on junior investment banking staff, we assume to support key hires made as part of Numis’s earlier investment in staff. Remote working has not disrupted the business and the company has not furloughed staff or accessed any government support schemes.
Background and outlook
We start with charts showing the level of London Stock Exchange trading activity and UK equity indices. Exhibit 2 shows that trading activity rose to levels seen in the global financial crisis, as the impact of the pandemic began to become evident, but has subsequently subsided. Given the uncertainty over how the epidemic and its economic ramifications will develop, further periods of elevated volatility and activity are possible.
Exhibit 3 records the dramatic fall and bounce back in UK equity indices that has been seen in recent weeks. On a five-year view, AIM issuers (CBOE Alternative UK 100) and All-Companies indices are down c 22% from their peak levels, while the CBOE Small Companies index is down 28%.
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Exhibit 2: LSE order book, average daily value traded |
Exhibit 3: UK equity indices |
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Source: London Stock Exchange (Main Market) |
Source: Refinitiv, CBOE indices |
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Exhibit 2: LSE order book, average daily value traded |
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|
Source: London Stock Exchange (Main Market) |
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Exhibit 3: UK equity indices |
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Source: Refinitiv, CBOE indices |
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 March and April as companies have issued equity to recapitalise their balance sheets in order to be able to deal with the consequences of the pandemic.
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Exhibit 4: Main Market money raised, new and further |
Exhibit 5: AIM money raised, new and further |
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|
|
Source: London Stock Exchange |
Source: London Stock Exchange |
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Exhibit 4: Main Market money raised, new and further |
|
|
Source: London Stock Exchange |
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Exhibit 5: AIM money raised, new and further |
|
|
Source: London Stock Exchange |
Such recapitalisations are a continuing feature of the equity market and Numis investment banking staff are fully occupied in providing clients with advice and executing transactions. Exhibit 6 shows the fund-raising transactions the company has been involved in since the end of H120.
Exhibit 6: Fund-raising transactions since end March
Company |
Date |
Numis’s role |
Transaction |
Money raised (£m) |
Asos |
14-Apr |
Joint global coordinator |
Placing |
247 |
Abcam |
17-Apr |
Joint corporate broker |
Placing |
110 |
The Gym Group |
21-Apr |
Joint book runner |
Placing |
41 |
Foxtons |
22-Apr |
Sole book runner |
Placing |
22 |
Hyve |
07-May |
Sponsor, Financial Adviser, Corporate Broker, Joint Global Coordinator, Joint Bookrunner & Joint Underwriter |
Rights issue |
127 |
Polypipe |
12-May |
Joint global coordinator and joint corporate broker |
Placing |
120 |
Keywords Studios |
14-May |
Financial Adviser, NOMAD, Broker, Joint Bookrunner |
Placing |
100 |
Scapa |
14-May |
Nominated Adviser, Joint Bookrunner and Joint Broker |
Placing |
33 |
Source: London Stock Exchange, Numis, Edison Investment Research
Management indicates these transactions and maintained average deal fees have contributed to an improvement in the performance of the investment banking business since the half year end. Numis also reports that the pipeline of recapitalisation transactions has continued to grow, which has partly offset a decline in M&A, private transaction and IPO opportunities where the outlook is described as challenging. This switch in emphasis within investment banking seems likely to persist for the balance of the financial year given the difficult economic background that is unfolding. The equities activities have seen a continued strong performance into the second half with institutional activity remaining at a higher level and trading seeing profitability maintained despite a reduction in trading book positions to contain risk.
As we note earlier, there could be a pause in both equities and investment banking businesses between the current phase of activity and the resumption of a more normal period of transactions as the crisis eases. Nevertheless, the strength of the Numis franchise and its balance sheet position mean that it should be well-placed to navigate such market fluctuations and take advantage of new opportunities as they emerge.
Financials
In line with our previous note in April, we are showing a range of potential outcomes in place of a point forecast for FY20. Our scenario analysis is set out in Exhibit 7. Compared with our previous scenarios the main change is the inclusion of the £1.9m write-down on the investment portfolio reported in the first half, which results in lower profit and earnings outcomes in each scenario.
Exhibit 7: Illustrative scenario analysis for FY20
£m unless stated |
Lower |
Mid |
Higher |
Revenue |
109.0 |
125.3 |
135.0 |
Other operating income (investment portfolio) |
-1.9 |
-1.9 |
-1.9 |
Total income |
107.1 |
123.4 |
133.1 |
Non staff costs |
(34.0) |
(34.0) |
(34.0) |
Staff costs |
(65.0) |
(72.6) |
(74.6) |
Operating profit |
8.1 |
16.8 |
24.5 |
Net finance income |
0.1 |
0.1 |
0.1 |
Pre-tax profit |
8.2 |
16.9 |
24.6 |
Tax |
(1.6) |
(3.2) |
(4.7) |
Net profit |
6.6 |
13.7 |
19.9 |
EPS (p) |
5.8 |
12.0 |
17.5 |
DPS (p) |
12.0 |
12.0 |
12.0 |
Return on equity |
5% |
10% |
14% |
Total cost/revenue |
91% |
85% |
80% |
Total staff cost/revenue |
60% |
58% |
55% |
Source: Edison Investment Research
Further details of the middle scenario are shown in the financial summary (Exhibit 8).
The move to a new London office at 40 Gresham Street has been affected by COVID-19, which has delayed construction work. The lease had been expected to begin near the end of FY20 with relocation expected to take place in H221. The lease is now expected to begin in H121 but with relocation still taking place in H221. 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 by approximately £3m per annum. In addition to this there will be fitout costs, which 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 end-March cash and cash equivalents of £95.3m compared with £84.2m at the September year end. The combination of cash and a rolling credit facility provides the group with committed liquidity of £130m available. The group also continues to have significant excess capital for regulatory purposes.
Looking at the half-year cash flow there was a net cash inflow from operations of £24m of which £13m was provided by a reduction in trading investments, while other working capital movements were broadly neutral with profit and non-cash accruals making up the balance. Share repurchases and the dividend payment absorbed just over £12m and, with other smaller items accounting for another £1m, in total there was a net cash inflow of £11m.
Valuation
With the substantial uncertainties surrounding estimates for both Numis and its peers we focus on price to book value as a valuation measure at this point. Exhibit 8 shows that this stands at 2.2x modestly above the 10-year average of 1.9x. This follows a sharp dip below the average when the share price fell with the equity market in the initial reaction as the scale of the pandemic began to become clear.
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Exhibit 8: 10-year history of the price to book value ratio for Numis |
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Source: Refinitiv, Edison Investment Research |
Using an ROE/COE valuation model to infer the ROE assumption required to match the 280p share price at time of writing gives a value of 17% (based on the H120 NAV of 129p 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 FY15–19 historical average of 18% still does not appear an unrealistic aspiration for subsequent years.
Exhibit 9: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
Mid scenario 2020e |
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Year end 30 September |
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PROFIT & LOSS |
||||||||
Revenue |
|
|
97,985 |
112,335 |
130,095 |
136,047 |
111,610 |
125,291 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(94,603) |
(85,432) |
(93,343) |
||
Share based payment |
(4,104) |
(6,229) |
(10,454) |
(10,583) |
(10,914) |
(10,250) |
||
EBITDA |
|
|
28,863 |
29,986 |
36,015 |
30,861 |
15,264 |
21,698 |
Depreciation |
|
|
(882) |
(1,126) |
(1,226) |
(1,113) |
(1,124) |
(2,894) |
Amortisation |
(111) |
(125) |
(89) |
(49) |
(44) |
(95) |
||
Operating Profit |
|
|
27,870 |
28,735 |
34,700 |
29,699 |
14,096 |
18,709 |
Net finance income |
190 |
37 |
188 |
212 |
550 |
60 |
||
Other operating income |
(1,978) |
3,759 |
3,431 |
1,733 |
(2,210) |
(1,904) |
||
Profit before tax |
|
|
26,082 |
32,531 |
38,319 |
31,644 |
12,436 |
16,865 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(4,967) |
(3,110) |
(3,204) |
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Profit after tax (FRS 3) |
|
|
21,549 |
26,399 |
30,377 |
26,677 |
9,326 |
13,661 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
115.8 |
114.9 |
114.0 |
||
EPS - basic (p) |
19.5 |
23.5 |
27.4 |
25.1 |
8.8 |
13.0 |
||
EPS - diluted (p) |
|
|
18.3 |
22.4 |
25.9 |
23.0 |
8.1 |
12.0 |
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 |
129.3 |
||
ROE (%) |
19% |
22% |
23% |
19% |
6.6% |
9.9% |
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EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
22.7% |
13.7% |
17.3% |
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Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
21.8% |
12.6% |
14.9% |
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BALANCE SHEET |
||||||||
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 |
378,541 |
Total assets |
|
|
285,838 |
317,984 |
413,997 |
541,248 |
333,473 |
388,212 |
Current liabilities |
|
|
(170,319) |
(188,895) |
(280,371) |
(398,112) |
(195,319) |
(248,940) |
Long term liabilities |
0 |
(12) |
0 |
0 |
0 |
(2,736) |
||
Net assets |
|
|
115,519 |
129,077 |
133,626 |
143,136 |
138,154 |
136,536 |
CASH FLOW |
||||||||
Operating cash flow |
|
|
6,467 |
48,735 |
43,369 |
45,830 |
(2,748) |
36,251 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(1,014) |
(77) |
151 |
||
Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(29,035) |
(24,646) |
(26,967) |
||
Net cash flow |
|
|
(14,675) |
29,239 |
6,812 |
15,781 |
(27,471) |
11,159 |
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) |
(95,361) |
Source: Company data, Edison Investment Research
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Research: Healthcare
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