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Research: Financials
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.
Written by
Numis Corporation |
Diversification mitigates lower activity |
H122 trading update |
Financial services |
4 April 2022 |
Share price performance
Business description
Next events
Analysts
Numis Corporation is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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.
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Exhibit 1: Main Market money raised |
Exhibit 2: AIM money raised |
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Source: London Stock Exchange (last data February 2022) |
Source: London Stock Exchange (last data February 2022) |
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Exhibit 1: Main Market money raised |
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Source: London Stock Exchange (last data February 2022) |
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Exhibit 2: AIM money raised |
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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.
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Exhibit 3: LSE average daily value traded (£m) |
Exhibit 4: UK equity indices |
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Source: London Stock Exchange (Main Market order book and AIM) |
Source: Refinitiv, CBOE indices |
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Exhibit 3: LSE average daily value traded (£m) |
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Source: London Stock Exchange (Main Market order book and AIM) |
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Exhibit 4: UK equity indices |
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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) |
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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.
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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 |
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 |
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Year end 30 September |
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PROFIT & LOSS |
|||||||||||
Revenue |
|
|
112,335 |
130,095 |
136,047 |
111,610 |
154,899 |
215,582 |
147,490 |
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Administrative expenses (excl. amortisation and depreciation) |
(76,120) |
(83,626) |
(94,603) |
(85,432) |
(105,327) |
(133,651) |
(109,280) |
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Share based payment |
(6,229) |
(10,454) |
(10,583) |
(10,914) |
(9,961) |
(9,634) |
(7,000) |
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EBITDA |
|
|
29,986 |
36,015 |
30,861 |
15,264 |
39,611 |
72,297 |
31,210 |
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Depreciation |
|
|
(1,126) |
(1,226) |
(1,113) |
(1,124) |
(3,016) |
(4,416) |
(5,020) |
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Amortisation |
(125) |
(89) |
(49) |
(44) |
(105) |
(158) |
(70) |
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Operating Profit |
|
|
28,735 |
34,700 |
29,699 |
14,096 |
36,490 |
67,723 |
26,120 |
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Net finance income |
37 |
188 |
212 |
550 |
263 |
(2,288) |
(1,050) |
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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 |
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Tax |
(6,132) |
(7,942) |
(4,967) |
(3,110) |
(5,713) |
(16,303) |
(4,763) |
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Profit after tax (FRS 3) |
|
|
26,399 |
30,377 |
26,677 |
9,326 |
31,350 |
57,847 |
20,307 |
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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% |
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BALANCE SHEET |
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Fixed assets |
|
|
5,522 |
6,147 |
8,215 |
6,832 |
12,639 |
52,641 |
47,905 |
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Current assets |
|
|
312,462 |
407,850 |
533,033 |
326,641 |
509,034 |
683,319 |
685,236 |
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Total assets |
|
|
317,984 |
413,997 |
541,248 |
333,473 |
521,673 |
735,960 |
733,141 |
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Current liabilities |
|
|
(188,895) |
(280,371) |
(398,112) |
(195,319) |
(361,397) |
(509,654) |
(509,654) |
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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 |
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CASH FLOW |
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Operating cash flow |
|
|
48,735 |
43,369 |
45,830 |
(2,748) |
65,953 |
58,329 |
35,433 |
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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) |
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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) |
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Source: Company data, Edison Investment Research
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Research: Real Estate
Target Healthcare REIT’s H122 results demonstrate a resilient performance, and completed and prospective capital deployment chart a path to further strong earnings growth and full dividend cover. Indexed rent uplifts, an extension of long-term fixed-rate debt, and an historical ability of operators to match inflation pressures with fee growth offer good inflation protection.