Numis Corporation — Diversification mitigates lower activity

Numis Corporation (LSE: NUM)

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Research: Financials

Numis Corporation — Diversification mitigates lower activity

The combination of rising macroeconomic concerns and the outbreak of a war in Europe has had a chilling impact on equity capital markets activity, emphasising the potential volatility in these revenues. We have reduced our estimates for Numis accordingly. As a test of Numis’s work to diversify its business by developing M&A advisory and private markets strands, H122 has been a success, with these revenues proving resilient. On a longer view, the strength of the overall franchise remains a key attraction for investors.

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Financials

Numis Corporation

Diversification mitigates lower activity

H122 trading update

Financial services

4 April 2022

Price

262p

Market cap

£299m

Net cash (£m) at end September 2021

134.1

Shares in issue

114.4m

Free float

75%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.4)

(23.7)

(30.8)

Rel (local)

(3.2)

(23.5)

(36.5)

52-week high/low

398p

238p

Business description

Numis Corporation is one of the UK's leading independent investment banking groups, offering a full range of research, execution, equity capital markets, corporate broking and advisory services. At the end of September 2021, it employed 319 staff in offices in London, Dublin and New York, and had 182 corporate clients.

Next events

H122 results

6 May 2022

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

The combination of rising macroeconomic concerns and the outbreak of a war in Europe has had a chilling impact on equity capital markets activity, emphasising the potential volatility in these revenues. We have reduced our estimates for Numis accordingly. As a test of Numis’s work to diversify its business by developing M&A advisory and private markets strands, H122 has been a success, with these revenues proving resilient. On a longer view, the strength of the overall franchise remains a key attraction for investors.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/19

111.6

12.4

8.1

12.0

32.3

4.6

09/20

154.9

37.1

26.7

12.0

9.8

4.6

09/21

215.6

74.2

49.1

13.5

5.3

5.2

09/22e

147.5

25.1

17.2

13.5

15.3

5.2

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

Equity capital markets soft, other areas resilient

Numis reports that within Investment Banking, weaker market conditions for equity issuance affected transaction volumes in its first half to end March 2022. Fortunately, the group’s investment in developing M&A advisory and private markets (Growth Capital Solutions) capabilities has reduced the impact, with both activities matching the level of revenue achieved in H121. The company expects Equities revenues to be 20% lower than the prior year period, with institutional and research income resilient but trading income lower than the strong H121 performance. Group revenues are expected to be in the region of £74m which compares with £115.4m in H121 and £100.2m in H221.

Outlook and estimates

Numis indicates that the outlook for the M&A advisory activity remains positive despite market volatility, with visibility for fees from transactions already announced and a strong pipeline. The capital market outlook is less clear given the geopolitical and macroeconomic background. However, resilience in equity markets is seen as potentially supporting some recovery of activity here in H222, albeit IPOs may remain muted. We have factored this into our second half assumptions, together with continued strength in M&A and Growth Capital Solutions, and resilience in Institutional revenue, resulting in FY22e revenue of £147m compared with our previous forecast of £181m. Variable compensation moderates operational gearing and the reduction in our pre-tax profit estimate, which moves from £44m to £25m.

Valuation

The Numis share price is down nearly 25% over the last three months reflecting the tough trading conditions evidenced in the trading update. On our revised estimate the P/E multiple would be 15.3x, but this is set to be a relatively muted year and, looking at a more stable measure, price to book, the shares trade on a multiple of 1.6x, significantly below the 10-year average of 2.1x. The yield, at over 5%, is also supportive.

Background

In this section we show data for issuance on the London Stock Exchange Main Market and AIM, the level of average daily value traded and movements in all-companies and small-cap equity indices.

The first two charts show how the first quarter of Numis’s current financial year, starting in October 2021, saw generally high levels of activity in both the Main Market and AIM with a mixture of new and further issuance. In the last two months shown (January and February 2022) growing concern over the prospect of rising policy rates and inflation dampened confidence and issuance, particularly new issues. While not captured on the charts, the additional uncertainty introduced by the war in Ukraine has acted as a further brake on new issue activity.

Exhibit 1: Main Market money raised

Exhibit 2: AIM money raised

Source: London Stock Exchange (last data February 2022)

Source: London Stock Exchange (last data February 2022)

Exhibit 1: Main Market money raised

Source: London Stock Exchange (last data February 2022)

Exhibit 2: AIM money raised

Source: London Stock Exchange (last data February 2022)

Trading activity (Exhibit 3) had previously peaked with the onset of the pandemic in March 2020 (Main Market) and subsequently on AIM when there was a rotation into higher risk/small-cap stocks. That rotation is also evident in the relative performance of the All-Companies and Small-cap indices. Most recently Main Market trading has increased with heightened volatility. The equity indices dipped as an immediate reaction to the attack on Ukraine but have subsequently recovered. Further volatility seems quite likely given the uncertain duration and outcome of the conflict and its economic ramifications.

Exhibit 3: LSE average daily value traded (£m)

Exhibit 4: UK equity indices

Source: London Stock Exchange (Main Market order book and AIM)

Source: Refinitiv, CBOE indices

Exhibit 3: LSE average daily value traded (£m)

Source: London Stock Exchange (Main Market order book and AIM)

Exhibit 4: UK equity indices

Source: Refinitiv, CBOE indices

Estimate changes

Exhibit 5 shows an analysis of our revenue assumptions for FY22 with prior-year comparatives. The considerable uncertainty over revenues in any particular period should be borne in mind when viewing the estimates.

Exhibit 5: Revenue analysis

£000s

2018

2019

2020

2021

2022e

Net trading gains

9,594

4,008

16,003

19,754

14,800

Institutional income

37,866

33,317

37,192

40,957

38,000

Equities

47,460

37,325

53,195

60,711

52,800

Corporate retainers

12,430

13,357

13,536

12,471

12,690

Advisory

17,335

12,576

11,146

30,884

31,400

Capital markets

58,822

48,352

77,022

111,516

50,600

Investment banking

88,587

74,285

101,704

154,871

94,690

Total revenue

136,047

111,610

154,899

215,582

147,490

Source: Numis, Edison Investment Research estimates

As an indication of the sensitivity of profitability, taking into account variable compensation and holding other assumptions in our model stable, a £10m change in our revenue assumption would move pre-tax profit by roughly £4m. On another calculation we estimate that even if revenue fell to around £110m, the business would still break even while maintaining its capabilities to service clients and execute transactions when market conditions improved. We note that since revenue was last at that level, in 2019, the head count has risen by 15% to 319 at end FY21 and the group has a new London office.

Changes in the key numbers from our forecasts are shown below, with further detail from the new forecast given in the financial summary table (Exhibit 8).

Exhibit 6: Estimate changes

Revenue (£m)

PBT (£m)

Fully diluted EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

09/22e

181.4

147.5

-18.7%

44.3

25.1

-43.4%

30.2

17.2

-43.3%

13.5

13.5

0.0%

Source: Edison Investment Research

Valuation

The chart below shows a 10-year history of the price to book ratio for Numis. Following a period of share price weakness the current value is 1.6x, well below the 10-year average of 2.1x.

Exhibit 7: 10-year history of the price to book value ratio for Numis

Source: Refinitiv, Edison Investment Research

Using an ROE/COE model to infer the ROE required to match the share price at the time of writing (262p) gives a value of under 13.5%: above the 11% suggested by our estimate for FY22 but below the three, five and 10-year averages of 22%, 18% and 19% respectively (calculated including the relatively depressed FY22 estimate). Following the increase in dividend for FY21 (from 12p to 13.5p) the shares yield over 5%.

Exhibit 8: Financial summary

£'000s

2016

2017

2018

2019

2020

2021

2022e

Year end 30 September

PROFIT & LOSS

Revenue

 

 

112,335

130,095

136,047

111,610

154,899

215,582

147,490

Administrative expenses (excl. amortisation and depreciation)

(76,120)

(83,626)

(94,603)

(85,432)

(105,327)

(133,651)

(109,280)

Share based payment

(6,229)

(10,454)

(10,583)

(10,914)

(9,961)

(9,634)

(7,000)

EBITDA

 

 

29,986

36,015

30,861

15,264

39,611

72,297

31,210

Depreciation

 

 

(1,126)

(1,226)

(1,113)

(1,124)

(3,016)

(4,416)

(5,020)

Amortisation

(125)

(89)

(49)

(44)

(105)

(158)

(70)

Operating Profit

 

 

28,735

34,700

29,699

14,096

36,490

67,723

26,120

Net finance income

37

188

212

550

263

(2,288)

(1,050)

Non recurring items

0

0

0

0

0

0

0

Other operating income

3,759

3,431

1,733

(2,210)

310

8,715

0

Profit before tax

 

 

32,531

38,319

31,644

12,436

37,063

74,150

25,070

Tax

(6,132)

(7,942)

(4,967)

(3,110)

(5,713)

(16,303)

(4,763)

Profit after tax (FRS 3)

 

 

26,399

30,377

26,677

9,326

31,350

57,847

20,307

Average diluted number of shares outstanding (m)

118.0

117.2

115.8

114.9

117.3

117.7

118.3

EPS - basic (p)

23.5

27.4

25.1

8.8

29.9

54.2

18.6

EPS - diluted (p)

 

 

22.4

25.9

23.0

8.1

26.7

49.1

17.2

Dividend per share (p)

12.00

12.00

12.00

12.00

12.00

13.50

13.50

NAV per share (p)

113.5

125.0

135.0

131.3

149.8

168.3

171.3

ROE (%)

22%

23%

19%

6.6%

21.2%

33.6%

10.9%

EBITDA margin (%)

26.7%

27.7%

22.7%

13.7%

25.6%

33.5%

21.2%

Operating margin (%)

25.6%

26.7%

21.8%

12.6%

23.6%

31.4%

17.7%

BALANCE SHEET

Fixed assets

 

 

5,522

6,147

8,215

6,832

12,639

52,641

47,905

Current assets

 

 

312,462

407,850

533,033

326,641

509,034

683,319

685,236

Total assets

 

 

317,984

413,997

541,248

333,473

521,673

735,960

733,141

Current liabilities

 

 

(188,895)

(280,371)

(398,112)

(195,319)

(361,397)

(509,654)

(509,654)

Long term liabilities

(12)

0

0

0

(2,643)

(39,580)

(37,376)

Net assets

 

 

129,077

133,626

143,136

138,154

157,633

186,726

186,111

CASH FLOW

Operating cash flow

 

 

48,735

43,369

45,830

(2,748)

65,953

58,329

35,433

Net cash from investing activities

84

(198)

(1,014)

(77)

(474)

(9,190)

(3,390)

Net cash from (used in) financing

(19,580)

(36,359)

(29,035)

(24,646)

(24,451)

(39,857)

(30,126)

Net cash flow

 

 

29,239

6,812

15,781

(27,471)

41,028

9,282

1,917

Opening net (cash)/debt

 

 

(59,591)

(89,002)

(95,852)

(111,673)

(84,202)

(125,217)

(134,125)

FX effect

 

 

172

38

40

0

(13)

(374)

0

Closing net (cash)/debt

 

 

(89,002)

(95,852)

(111,673)

(84,202)

(125,217)

(134,125)

(136,042)

Source: Company data, Edison Investment Research


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 £60,000 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.

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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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

1185 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

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

1185 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

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 £60,000 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.

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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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

1185 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

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

1185 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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