Cenkos Securities — Costs adjusted to protect profitability

Cenkos Securities (AIM: CNKS)

Last close As at 22/06/2024

29.00

0.00 (0.00%)

Market capitalisation

GBP15m

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Research: Financials

Cenkos Securities — Costs adjusted to protect profitability

Ebiquity’s pre-close update indicates that trading has been in line with management and market estimates and we are making no changes to our numbers at this point. Post year-end news flow has been constructive (the Digital Decisions acquisition and the buy-in of the Italian minority). A potentially bigger opportunity comes from the news that Accenture is planning to withdraw from media measurement. Ebiquity’s share price has been trading near 10-year lows, putting the valuation at a marked discount to the smaller marcomms companies on an EV/EBITDA and on a P/E basis.

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Financials

Cenkos Securities

Costs adjusted to protect profitability

Trading update

Financial services

21 February 2020

Price

65p

Market cap

£37m

Net cash (£m) at end June 2019

14.7

Shares in issue

56.7m

Free float

66%

Code

CNKS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.2

56.6

(4.4)

Rel (local)

12.7

51.6

(8.8)

52-week high/low

70p

38p

Business description

Cenkos is a leading UK securities business which acts as nominated advisor, sponsor, broker and financial adviser to companies across all sectors and stages of growth. Since inception in 2005 it has raised more than £19.6bn in equity capital for corporate clients, which currently number 110. The business has an approach where fixed costs are contained and variable rewards are closely geared to revenues.

Next events

FY19 results

March 2020

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Cenkos Securities is a research client of Edison Investment Research Limited

2019 was a difficult year for UK equity capital markets activity, and Cenkos demonstrated the strength of its flexible business model and the client relationships sustained by its staff, achieving full year profitability despite one-off restructuring costs. Lower fixed costs will benefit future earnings and Cenkos reports a positive start to 2020 with a strong pipeline. Conservatively, we have reduced our revenue/earnings assumptions for this year, but improved market/investor confidence could generate significant upside.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

59.5

10.0

13.2

9.0

4.9

13.8

12/18

45.0

3.2

4.2

4.5

15.3

6.9

12/19e

27.0

0.2

(0.1)

4.0

N/A

6.2

12/20e

32.5

2.0

2.7

4.5

24.4

6.9

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

FY19 trading update

Cenkos noted the challenging equity market conditions that were a feature of 2019 with reduced equity issuance and institutional trading activity. Against this background, it took steps to reduce its cost base and indicates that the annual fixed cost base is expected to be more than £3m below the level of 2019. The restructuring will give rise to one-off costs of approximately £1.4m in H219. Despite this additional cost, an improvement in second half revenues, supported by a number of significant fund-raisings, has (subject to audit) allowed a return to profitability in the second half and for the full year following a £0.2m pre-tax loss in the first half.

Outlook: A good start to the year

Cenkos indicates that the stronger momentum seen in the second half of 2019 has continued into the current year and that the strength of its transaction pipeline is encouraging. Reflecting this, the board expects to announce a final dividend with its full year figures in late March. Taking into account the update comments, we have tempered our revenue and recurring cost assumptions for 2019, leaving PBT at £0.25m (£1m previously), including the £1.4m restructuring cost. Given macro uncertainties potentially affecting investor and corporate confidence, we have chosen to adopt a more conservative revenue assumption for 2020 (and sensitivity range – see Exhibit 3) but still look for a 20% recovery in revenues and a significant profit bounce to £2m, with the potential for positive surprises if equity market activity builds and sustains further strength.

Valuation

On our assumptions (page 3), the current share price implies that the market is assuming an ROE of c 12% for Cenkos, above our current year estimate of 6%. However, this would represent a still relatively depressed level and over 10 years the group has achieved an average ROE of 26%. Similarly, the current price to book ratio of 1.3x compares with a 10-year average of 2.3x.

Appointment of chairman

Jeff Hewitt, a non-executive director since 2008, has been acting non-executive chairman since November 2018. Following a search process, Cenkos has announced the appointment, subject to FCA approval, of Lisa Gordon as non-executive chairman. Jeff Hewitt is to retire from the board at the end of February and, if necessary, non-executive director Jeremy Miller will take the position of acting chairman for any interim period.

Lisa Gordon brings more than 25 years of board experience in executive and non-executive positions at both listed and private companies. She is a non-executive director of Alpha FX Group, an AIM-listed corporate foreign exchange specialist, and also the non-executive chairman of Albert Technologies, an AI technology business operating in the digital marketing sector. She was previously a founding director of Local World, which was acquired by Trinity Mirror in 2015, COO of Yattendon Group, a private conglomerate, and corporate development director of Chrysalis Group, a media group. Her early experience was as an analyst at Greig Middleton and County NatWest Securities.

Transactions

Exhibit 1 shows selected transactions in which Cenkos was involved during 2019. AIM total new issues touched a 25-year low last year and there were only 10 IPOs. These included three undertaken by Cenkos (Diaceutics, Brickability and MJ Hudson), underlining the value of its strong track record in raising funds (see our November initiation note for further detail). Since the year end, City AM has reported that Cenkos has been appointed as broker for the potential flotation of FRP Advisory, a provider of corporate restructuring and other corporate finance services, with a possible valuation of £200m. Cenkos’s corporate client Share plc has announced that terms have been agreed for its acquisition by Interactive Investor, a transaction the companies expect to complete in Q320, subject to satisfaction of relevant conditions. Cenkos has highlighted the strength of its pipeline and the pace with which transactions flow through will depend on continued resilience of market levels, together with corporate confidence and institutional investor appetite.

Exhibit 1: Selected completed transactions during 2019 (£m unless shown)

Month

Company

Transaction

Consideration

February

Kromek

Placing

21.0

March

Diaceutics

IPO

17.0

April

Seeing Machines

Placing

27.5

Tasty

Placing

3.3

May

Landlore Resources

Placing

1.0

Falcon Oil & Gas

Placing

US$9.0

June

GCP Asset Backed Income Fund

Placing

63.3

Collagen Solutions

Placing

6.0

Marlowe

Placing and acquisition

20.0

July

Dods

Placing

13.2

August

Brickability

IPO

56.7

Intelligent Ultrasound

Placing

6.3

Rotala

Placing

1.1

September

Inspiration Healthcare

Placing

4.3

Equals

Placing

14.3

October

Duke Royalty

Placing

17.5

December

MJ Hudson

IPO

31.4

Corero Network Security

Placing

3.3

Creo Medical

Placing

51.9

Total

366.1

Source: Cenkos Securities

Estimate changes and sensitivity analysis

Exhibit 2 shows changes in key figures from our estimates, with further detail given in the financial summary. As noted earlier, our more conservative assumption for revenues simply reflects the macro uncertainty that remains a factor in markets. Post-Brexit negotiations may weigh on confidence during the year, impinging on the number of transactions completed. Nevertheless, Cenkos itself is confident in the strength of its pipeline, and recent statements from Arden and Numis also reference higher current/prospective levels of activity. As an alternative indicator, RBG Holdings (legal and other professional services) reported in a January trading update that its corporate division, focused on commercial transactions, is beginning to see a significant increase in the number of transactions it is working on.

Exhibit 2: Estimate changes

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

12/19e

29.5

27.0

-8%

1.0

0.2

-75%

1.0

(0.1)

N/A

4.0

4.0

0%

12/20e

37.5

32.5

-13%

3.5

2.0

-43%

5.0

2.7

-46%

4.5

4.5

0%

Source: Edison Investment Research

As in our initiation note, we underline the uncertainty of prospective revenues and the benefits of the group’s flexible cost base by including an analysis illustrating two alternative scenarios above and below the revenue assumption we have used in our forecast for 2020 (Exhibit 3). As shown, on our estimates, a £2.5m revenue variation would feed through to a change of £0.5m and £0.75m in pretax profits on the low and high scenarios, respectively. For reference, adjusting our previous central revenue scenario (£37.5m) for the revised cost base and other assumptions would, we estimate, result in pre-tax profit of £4m and EPS of 5.8p (5.0p previously).

Exhibit 3: P&L scenario analysis

£000 unless stated

Low

Central

High

Revenues

30,000

32,500

35,000

Non-staff costs

(7,770)

(7,770)

(7,770)

Staff costs

(20,840)

(22,840)

(24,590)

Operating profit

1,390

1,890

2,640

Investment income

130

130

130

Finance income

(20)

(20)

(20)

Pre-tax profit

1,500

2,000

2,750

Tax

(285)

(380)

(523)

Net profit

1,215

1,620

2,228

Cost/income ratio

95.4%

94.2%

92.5%

Staff costs/revenue

69.5%

70.3%

70.3%

EPS (p)

1.9

2.7

3.9

Source: Edison Investment Research

Finally in this section, it is worth recalling the strength of the Cenkos balance sheet, with end-H119 cash and cash equivalents of £14.7m, and regulatory capital resources £15.9m above the Pillar 1 requirement.

Valuation

On our revised central estimate, Cenkos would generate a return on equity of 6% in 2020, while if our previous assumption for revenues was achieved this would rise to 12%. Using an ROE/COE model and assuming a cost of equity of 10% and growth of 4% suggests the share price at the time of writing (65p) does imply that the market is assuming approximately 12% as the prospective sustainable return. While well ahead of our current year estimate, this has to be seen in the context of the long-term average returns delivered by Cenkos of 28% and 26% over five and 10 years, respectively.

Similarly, the history of the price to book ratio shows that the current multiple of 1.3x compares with a 10-year average of 2.3x (see Exhibit 4 below).

Exhibit 4: 10-year history of the price to book value ratio for Cenkos

Source: Refinitiv, Edison Investment Research

Exhibit 5: Financial summary

£000s

2015

2016

2017

2018

2019e

2020e

Year end 31 December

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

76,513

43,743

59,504

44,953

27,000

32,500

Admininstration expenses (ex depreciation)

(56,510)

(38,581)

(49,286)

(41,655)

(24,812)

(30,320)

EBITDA

20,003

5,162

10,218

3,298

2,188

2,180

Depreciation

(241)

(182)

(242)

(247)

(648)

(290)

Operating profit

19,762

4,980

9,976

3,051

1,540

1,890

Non-recurring items

0

0

0

0

(1,400)

0

Investment revenues

134

83

23

103

110

110

Profit before tax

19,896

5,063

9,999

3,154

250

2,000

Tax

(4,525)

(1,858)

(1,815)

(805)

(90)

(380)

Profit after tax, continuing operations

15,371

3,205

8,184

2,349

160

1,620

Discontinued operations

0

(661)

(973)

0

0

0

Profit after tax

15,371

2,544

7,211

2,349

160

1,620

Average number of shares outstanding (m)

56.5

54.7

54.7

51.8

51.0

51.0

EPS continuing operations (p)

27.2

5.9

15.0

4.2

(0.1)

2.7

Fully diluted EPS (p)

26.8

4.6

13.2

4.2

(0.1)

2.7

Dividend per share (p)

14.00

6.00

9.00

4.50

4.00

4.50

NAV per share (p)

53.0

49.8

56.2

54.0

51.1

53.4

ROE (%)

43%

10%

25%

8%

1%

6%

Cost/income ratio

74.2%

88.6%

83.2%

93.2%

94.3%

94.2%

Staff costs/Revenue

60.1%

68.3%

63.7%

64.4%

63.8%

70.3%

BALANCE SHEET

 

 

 

 

 

 

 

Non-current assets

1,626

625

1,263

1,178

6,538

5,868

Property, plant and equipment

296

389

525

558

591

601

Other non-current assets

1,330

236

738

620

5,947

5,267

Current assets

64,725

62,692

68,492

65,334

54,185

55,355

Other current assets inc Investments - long positions

12,706

13,811

10,615

12,648

10,168

10,168

Cash

33,106

23,795

36,829

33,635

25,483

26,653

Debtors and other

18,913

25,086

21,048

19,051

18,534

18,534

Current liabilities

(37,432)

(35,254)

(39,641)

(38,658)

(34,507)

(33,827)

Other current liabilities inc short positions

(2,551)

(2,694)

(3,341)

(6,018)

(9,007)

(8,327)

Other current liabilities

(34,881)

(32,560)

(36,300)

(32,640)

(25,500)

(25,500)

Non-current liabilities

(351)

(880)

(366)

(263)

(171)

(171)

Net assets

28,568

27,183

29,748

27,591

26,045

27,225

CASH FLOW

 

 

 

 

 

 

 

Operating cash flow

15,538

(465)

6,917

3,180

2,250

4,460

Working capital and other items

16,184

(1,387)

13,490

1,444

(6,134)

0

Tax paid

(5,049)

(2,533)

(1,334)

(1,664)

(285)

(380)

Net cash from operating items

26,673

(4,385)

19,073

2,960

(4,169)

4,080

Fixed asset investment

(174)

(272)

(378)

(280)

(307)

(300)

Acquisitions/disposals

0

0

0

(100)

0

0

Other investing activities

191

93

23

90

104

110

Share (purchase)/issuance

(16,823)

(438)

(549)

(2,353)

(678)

0

Ordinary dividends

(9,740)

(4,367)

(5,201)

(3,573)

(2,418)

(2,040)

Other financing

47

58

66

62

(684)

(680)

Other

0

0

0

0

0

0

Net cash flow

174

(9,311)

13,034

(3,194)

(8,152)

1,170

Opening net (debt)/cash

32,932

33,106

23,795

36,829

33,635

25,483

FX

0

0

0

0

0

0

Closing net (debt)/cash

33,106

23,795

36,829

33,635

25,483

26,653

Source: Cenkos Securities accounts, Edison Investment Research


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This report has been commissioned by Cenkos Securities and prepared and issued by Edison, in consideration of a fee payable by Cenkos Securities. 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.

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This report has been commissioned by Cenkos Securities and prepared and issued by Edison, in consideration of a fee payable by Cenkos Securities. 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 research department of Edison 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.

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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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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.

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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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: TMT

Ebiquity — Accentuating the opportunities

Ebiquity’s pre-close update indicates that trading has been in line with management and market estimates and we are making no changes to our numbers at this point. Post year-end news flow has been constructive (the Digital Decisions acquisition and the buy-in of the Italian minority). A potentially bigger opportunity comes from the news that Accenture is planning to withdraw from media measurement. Ebiquity’s share price has been trading near 10-year lows, putting the valuation at a marked discount to the smaller marcomms companies on an EV/EBITDA and on a P/E basis.

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