Cenkos Securities — Gained market share in tough conditions

Cenkos Securities (AIM: CNKS)

Last close As at 16/07/2024

29.00

0.00 (0.00%)

Market capitalisation

GBP15m

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Research: Financials

Cenkos Securities — Gained market share in tough conditions

The much-reduced level of capital markets activity in 2022 meant sharply lower profitability for Cenkos, although control over fixed costs and reduced variable compensation provided some mitigation. The group continued to focus on client service, gained share in AIM fund-raising (to 15%), has made net additions to its client base and, supported by a strong balance sheet, has made selective staff hires to strengthen its capabilities.

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Financials

Cenkos Securities

Gained market share in tough conditions

FY22 results

Financial services

15 March 2023

Price

42p

Market cap

£24m

Net cash (£m) at end December 2022

14.2

Shares in issue

56.7m

Free float

75%

Code

CNKS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(21.4)

(11.0)

(29.0)

Rel (local)

(18.0)

(12.4)

(31.6)

52-week high/low

81p

40p

Business description

Cenkos is a leading UK securities business. It acts as nominated advisor, sponsor, broker and financial adviser to companies, focusing on UK small- and mid-cap companies and investment funds. Since inception in 2005 it has raised more than £22bn in equity capital for corporate clients, which stood at 107 at end December 2022.

Next events

AGM

May 2023

Analysts

Andrew Mitchell

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5725

Cenkos Securities is a research client of Edison Investment Research Limited

The much-reduced level of capital markets activity in 2022 meant sharply lower profitability for Cenkos, although control over fixed costs and reduced variable compensation provided some mitigation. The group continued to focus on client service, gained share in AIM fund-raising (to 15%), has made net additions to its client base and, supported by a strong balance sheet, has made selective staff hires to strengthen its capabilities.

Year

end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

25.9

0.15

0.1

3.0

N/A

7.1

12/20

31.7

2.25

3.3

3.5

12.7

8.3

12/21

37.2

3.95

6.0

4.3

7.0

10.1

12/22

20.3

(2.70)

(4.9)

1.5

N/A

3.6

Note: *PBT and EPS are reported with EPS on a fully diluted basis. Given uncertainty over the incidence of corporate transaction fees, we are not publishing forecasts at this point.

Flexible model mitigates impact of market downturn

As expected, Cenkos’s FY22 results reflected the very low level of capital markets transactions during the year; on AIM, for example, total money raised was down more than 70% from 2021 at roughly half the average for the previous 10 years and the lowest level since 2003. Against this background, the group’s total revenue was down 46% to £20.3m. Demonstrating its flexible model, the group contained fixed costs at only slightly above the FY21 level, while staff costs fell by 48%, allowing it to report a small underlying operating profit of £0.2m versus £4.4m in FY21. There was a reported pre-tax loss of £2.70m, compared with a profit of £3.95m. The main items excluded from underlying profits were changes in the fair value of options and warrants received in lieu of fees (£2.1m reduction) and incentive plan costs (£1.3m). The balance sheet remained strong with cash of £14.2m and capital above the regulatory requirement. Taking this and market conditions into account, a final dividend of 0.5p was announced giving a total for the year of 1.50p (4.25p).

Outlook uncertain but tentative signs of easing

Market conditions remain challenging, with macroeconomic and geopolitical uncertainty still elevated. On the other hand, equity market indices have strengthened since September last year and there are modest signs of increased activity following a low point in H222. Cenkos has increased its client count, gained market share and has a strong balance sheet to support selective hiring, leaving it well-placed to benefit when there is a more significant pick up in transactions.

Valuation

Following recent weakness, Cenkos shares trade on a price to book value of 1.1x, which compares with the 10-year average of 2.1x. Using an ROE/COE model, we calculate the current price implies a sustainable return on equity of below 11%, similar to the average for FY17–21 and underlying returns if revenue returned to its five-year average of £32m.

FY22 results analysis

Exhibit 1 sets out an analysis of the FY22 profit and loss account with the previous two years shown for comparison and also the first and second halves of FY22.

Total revenue fell by £17m or 46% to £20.3m for FY22. Corporate finance, down 52%, accounted for £14m of the reduction. Reflecting the market background, funds raised for clients in FY22 were less than half the FY21 level at £524m (see Exhibit 2). Positively, nomad, broking and research proved resilient, supported by recurring retainer fees and a net increase in the client list; revenues for the division increased by 7%. Even though there was substantial market volatility, execution net trading gains for the year remained positive. Nevertheless, net gains decreased by 87% to £0.5m and there was a small loss in the second half.

Staff costs, excluding restructuring costs and incentive plans, were 48% lower given the reduction in pre-bonus profitability and hence variable compensation. Underlying staff costs as a percentage of revenue dropped slightly to 62% compared with 65% in FY21. The average number of employees increased to 97 (FY21: 91). Cenkos continues to make selective hires to strengthen its capabilities. Appointments have been made in sponsor services, M&A and group management.

Administrative expenses, excluding restructuring costs and incentive plans, decreased by 4% mainly due to the decrease in transaction costs associated with corporate finance deals.

A £12.8m reduction in total underlying costs enabled Cenkos to remain in underlying profit albeit £4.1m or 95% lower than in FY21.

Exhibit 1: P&L analysis (year end 31 December)

£000

H122

H222

FY20

FY21

FY22

% change

Revenue

Corporate finance

8,652

4,510

22,250

27,184

13,162

-52

Nomad, broking and research

3,208

3,369

6,175

6,172

6,577

7

Execution – net trading gains

822

(301)

3,229

3,869

521

-87

Total revenue

12,682

7,578

31,654

37,225

20,260

-46

Deduct day one value of options and warrants

(192)

(375)

(1,614)

(567)

-65

Staff costs

(7,109)

(5,457)

(21,304)

(24,080)

(12,566)

-48

Admin expenses ex restructuring and incentive plans

(3,457)

(3,433)

(6,585)

(7,158)

(6,890)

-4

Underlying profit (loss)

1,924

(1,687)

3,765

4,373

237

-95

Add back day one value of options and warrants

192

375

1,614

567

-65

Other operating income/expense

(1,936)

(222)

259

(87)

(2,158)

Restructuring costs

(725)

(396)

Incentive plans

(624)

(665)

(900)

(1,400)

(1,289)*

-8

Operating profit

(444)

(2,199)

2,399

4,104

(2,643)

-164

Investment income – interest income

46

63

30

17

109

Finance costs – interest on lease liability

(85)

(84)

(176)

(171)

(169)

-1

Profit before tax

(483)

(2,220)

2,253

3,950

(2,703)

Tax

94

368

(449)

(552)

462

Profit after tax

(389)

(1,852)

1,804

3,398

(2,241)

Earnings per share (p)

(0.8)

(4.1)

3.7

7.1

(4.9)

Diluted earnings per share (p)

N/A

N/A

3.3

6.0

N/A

Dividend per share (p)

1.00

0.50

3.50

4.25

1.50

-65

Source: Cenkos, Edison Investment Research. *For FY22 incentive plan and restructuring costs were not broken out separately but the latter were not material.

In order to reconcile underlying with reported operating profit we need to add back the day one value of options and warrants and adjust for changes in their fair value. Charges relating to restructuring and incentive plans are also deducted. In FY22 the main items were a £2.2m reduction of fair value of options and warrants (shown under other operating income/expense) and a £1.3m charge, almost all relating to incentive plans.

After a small net interest item, the result was a pre-tax loss of £2.7m compared with a profit of £4.0m in FY21.

Keen to maintain its unbroken dividend distribution record but acknowledging the tough market and reduced revenue level, Cenkos proposed a final dividend of 0.5p, bringing the total for FY22 to 1.5p per share, down from 4.25p in the previous year.

Exhibit 2: Performance indicators

2017

2018

2019

2020

2021

2022

Revenue per head (£m)

0.48

0.41

0.23

0.35

0.41

0.21

Corporate client base (number)

117

116

100

94

101

107

Funds raised for clients (£m)

2,533

1,193

664

944

1,207

524

Non-corporate finance revenue to fixed costs (%)

63

50

41

57

54

38

Cash at bank (£m)

36.8

33.6

18.3

32.7

33.5

14.2

Regulatory surplus over Pillar 1 capital requirements (£m)

9.6

11.2

13.5

14.5

15.8

N/A

Underlying profit (£m)

10.7

4.6

1.4

4.0

4.4

0.2

Dividend per share (p)

9.00

4.50

3.00

3.50

4.25

1.50

Source: Cenkos, Edison Investment Research

Exhibit 2 shows the key performance indicators used by Cenkos. Variations in revenue per head over the six years broadly reflect changes in funds raised for clients and hence revenues, which then feed through to the underlying profit. The corporate client count fell between 2017 and 2020, but growth subsequently resumed, with 17 new clients added in FY22 resulting in a net addition of six companies to the list after churn/M&A activity. Unsurprisingly, given the reduction in execution revenue, non-corporate finance revenue as a percentage of fixed costs fell by 16 percentage points to 38% over the year. As noted earlier, this implies that fixed costs were effectively held at the prior year level. Cash flow is discussed in the financials section, but in broad terms the reduction in cash from £33.5m to £14.2m mainly reflected lower profitability combined with the payment of prior year bonus awards, share buybacks and dividend payments.

The group is not showing the regulatory surplus metric following the introduction of the Investment Firms Prudential Regime (IFPR) at the beginning of 2022, which means comparable figures will not be published. The group notes that under the transitional arrangements, its overall regulatory capital requirement is similar to prior periods and at the year end it held regulatory capital of £20.4m, which was in excess of the requirement. Maintenance of a strong balance sheet and capital position enabling the group to grow opportunistically remains one of the board’s strategic objectives.

Against a background with low levels of activity, Cenkos indicates that it gained market share, advising on transactions accounting for 15% of total funds raised on AIM. This included the three largest initial public offerings (IPOs) by money raised (Facilities by ADF, Clean Power Hydrogen and Sondrel, which accounted for 55% of funds raised on AIM in relation to new issues). The latest AIM adviser directory shows that, for those companies with an identified adviser, Cenkos ranked second by number of roles with a share of 8% (finnCap ranked first with 9%) and fourth by market cap, again with a share of 8% (Numis first with 17%). The average market capitalisation for Cenkos clients was just above the overall average at £122m and this compared with £72m for finnCap and £636m for Numis, for example.

In execution services, Cenkos maintained a top three market share in 68% of client stocks (74% in FY21) and has expanded the number of AIM and Main Market stocks in which it makes markets from 231 to 315, extending its sectoral coverage within areas where it already has representation. Its risk criteria are maintained.

Background

In this section we discuss the trading background for Cenkos, including charts showing the recent performance of the UK equity market and levels of trading volume on the Main and AIM markets.

Looking at the UK equity market, Exhibit 3 shows the initial impact of COVID-19 in 2020 and then a period of recovery before macroeconomic concerns began to have greater influence, followed in 2022 by the initial reaction to the war in Ukraine and then the September mini budget. More recently markets strengthened as inflation/interest rate expectations moderated, although the recovery has stalled as opinions on the rate outlook continue to fluctuate. Periods of relative strength in small-cap equities, such as that from the end of 2020 to September 2021, reflected a rotation towards higher-risk/more economically sensitive stocks. Exhibit 4 shows trading activity levels on the Main Market and AIM, with each seeing spikes at different points following the pandemic, but both trending down more recently. For AIM, the average daily value traded in 2022 was down 32% compared with 2021, while for the Main Market the average was 4% higher.

Exhibit 3: UK equity indices

Exhibit 4: LSE average daily value traded (£m)

Source: Refinitiv, CBOE indices

Source: London Stock Exchange (Main Market order book and AIM, last value February)

Exhibit 3: UK equity indices

Source: Refinitiv, CBOE indices

Exhibit 4: LSE average daily value traded (£m)

Source: London Stock Exchange (Main Market order book and AIM, last value February)

The next two charts show levels of equity issuance on the London Stock Exchange Main Market and AIM since 2010. For both markets, activity strengthened in 2020, driven mainly by further issuance, with IPO numbers restricted by the market background. Fund-raising to support balance sheets played a prominent role for the Main Market in 2020 after the onset of the pandemic, but the subsequent bounce back in new issuance and fund-raising was directed more towards financing M&A and growth. In 2022, Main Market money raised fell by 68% and on AIM the reduction was 73% following three years of growth. Unsurprisingly given the fragile state of market confidence, the contraction in new issuance on AIM was particularly marked at 93% and total money raised in 2022 was down 73% compared with 2021, at the lowest level since 2003.

In the first two months of the current year, the level of activity on the Main Market and AIM has been lower than the same period last year but above the H222 run rate by 34% and 30%, respectively, bearing out Cenkos’s indication that the tough conditions seen last year have eased slightly.

Exhibit 5: Main Market money raised and new issues

Exhibit 6: AIM money raised and new issues

Source: London Stock Exchange

Source: London Stock Exchange

Exhibit 5: Main Market money raised and new issues

Source: London Stock Exchange

Exhibit 6: AIM money raised and new issues

Source: London Stock Exchange

Exhibit 7 provides further perspective by showing the annual rate of transactions for Cenkos’s clients since 2016. This highlights that a certain number of clients are likely to want to undertake equity supported transactions over a period of time. The number of transactions can be seen as a function of the nature of the client base, the number of clients, market conditions and the ability of the Cenkos team to execute. As would be expected, the number of transactions fluctuates between years, but between 2016 and 2021 the number of transactions as a percentage of the client base was between 25% and 35%, underlining how marked the reduction in activity to 15% in 2022 was.

A further variable as far as revenue is concerned is the size of transaction and nature of the mandate and this is evidenced in the table by the average deal fee. Here the range in the period shown was from just below £0.7m to just over £1.0m, with the latest value only slightly below average at £0.8m. To support improvements in the rate of transactions and average deal fee, Cenkos aims to be a long-term partner to ambitious companies potentially seeking equity capital to help support growth.

Exhibit 7: Cenkos transactions per client and average deal fee since 2016

2016

2017

2018

2019

2020

2021

2022

Transactions per client (%)

31

35

28

25

31

34

15

Number of transactions

36

41

32

25

29

34

16

Number of clients

116

117

116

100

94

101

107

Average deal fee (£m)

0.826

1.074

1.023

0.695

0.767

0.800

0.823

Source: Cenkos Securities, Edison Investment Research.

Financials

Given the uncertainty over prospective revenues, we do not include estimates in this note. It is nevertheless useful to consider the potential impact of the group’s model, which incorporates a disciplined approach to controlling fixed costs and alignment of remuneration with the long-term success of the business.

Each year Cenkos reports the percentage of fixed costs covered by non-corporate finance revenues (see Exhibit 2), allowing us to track an indicated level of underlying fixed costs. In FY22 these increased only marginally to £18.7m. Allowing for some impact of inflation in costs, we assume this could rise to nearly £20m. Ignoring the accrual of incentive plan costs, any restructuring costs or movements in the value of options and warrants, this would mean annual revenue would have to be £20m or below before an underlying loss was incurred. A recovery in revenue to £32m (in line with the five-year average) or £40m would generate pre-tax underlying profits of £3.4m or £5.8m respectively (making assumptions about the level of variable compensation); applying a tax rate of 25%, return on equity in these scenarios would be 10.5% and 17.9%.

Turning to cash flow, FY22 operating cash flow before working capital movements was modestly negative at £0.8m compared with an inflow of £5.9m in FY21. Working capital movements tend to be volatile between periods for stock broking firms and in FY22 there was a working capital outflow of £11.4m (a £1.5m inflow in FY21) with lower bonus accruals a factor here. After tax the net operating cash outflow was £12.8m. Share buybacks and dividends absorbed £5.4m (FY21: £5.0m). There were other net negative movements of nearly £1.0m, leaving an overall outflow of £19.2m and cash of £14.2m.

Valuation

As we do not currently publish forecasts for Cenkos and last reported earnings were negative, our valuation discussion is focused on the historical price to book ratio and the current implied sustainable return on equity based on an ROE/COE model.

Reflecting its capital markets exposure and bias towards small and mid-cap corporate clients, the Cenkos share price is down 24% over 12 months. This is similar to the average for other UK quoted brokers but weaker than the average for the larger US and European investment bank and advisory businesses (down 12% over the same period).

At a price of 42p the shares trade at a book multiple of 1.1x compared with the 10-year average of 2.1x (see Exhibit 8). Based on an ROE/COE model, assuming growth of 2% and a discount rate of 10%, the shares discount a sustainable ROE of 10.8%. This is in line with the average for FY17 to FY21 based on reported earnings and including the depressed result for FY19. It is also similar to the level that would be earned on an underlying basis if revenue returned to its five-year average level (FY18–FY22); see the Financials section above.

Exhibit 8: 10-year price to book value history

Source: Refinitiv, Edison Investment Research

Exhibit 9: Financial summary

£000s

2016

2017

2018

2019

2020

2021

2022

Year end 31 December

PROFIT & LOSS

 

 

 

 

 

 

 

 

Revenue

Corporate finance & placing fees

29,720

44,030

32,734

17,364

22,250

27,184

13,162

Corporate broking, research, and commission

10,514

8,222

7,824

6,582

6,175

6,172

6,577

Execution

3,509

7,252

4,395

1,970

3,229

3,869

521

Total revenue

43,743

59,504

44,953

25,916

31,654

37,225

20,260

Other income/expense

259

(87)

(2,158)

Administration expenses (ex depreciation)

(38,581)

(49,286)

(41,567)

(24,902)

(28,823)

(32,385)

(20,134)

EBITDA

5,162

10,218

3,386

1,014

3,090

4,753

(2,032)

Depreciation

(182)

(242)

(247)

(899)

(691)

(649)

(611)

Operating profit

4,980

9,976

3,139

115

2,399

4,104

(2,643)

Investment revenues

83

23

103

30

(146)

(154)

(60)

Profit before tax

5,063

9,999

3,242

145

2,253

3,950

(2,703)

Tax

(1,858)

(1,815)

(805)

(101)

(449)

(552)

462

Profit after tax, continuing operations

3,205

8,184

2,437

44

1,804

3,398

(2,241)

Discontinued operations

(661)

(973)

0

0

0

0

0

Profit after tax

2,544

7,211

2,437

44

1,804

3,398

(2,241)

Average number of shares outstanding (m)

54.7

54.7

51.8

51.2

49.2

48.0

45.6

EPS continuing operations (p)

5.9

15.0

4.4

0.1

3.7

7.1

(4.9)

Fully diluted EPS (p)

4.6

13.2

4.4

0.1

3.3

6.0

(4.9)

Dividend per share (p)

6.00

9.00

4.50

3.00

3.50

4.25

1.50

NAV per share (p)

47.9

52.5

48.7

43.5

45.2

47.6

38.4

ROE (%)

10%

25%

9%

0%

7%

13%

-9%

Cost/income ratio

88.6%

83.2%

93.0%

99.6%

93.2%

88.7%

102.4%

Staff costs/Revenue

68.3%

63.7%

64.4%

63.6%

71.4%

68.0%

64.6%

BALANCE SHEET

 

 

 

 

 

 

 

 

Non-current assets

625

1,263

1,179

5,611

5,202

5,130

5,574

Property, plant and equipment

389

525

558

517

382

398

409

Other non-current assets

236

738

621

5,094

4,820

4,732

5,165

Current assets

62,692

68,492

65,333

40,821

51,040

51,235

27,365

Other current assets inc Investments - long positions

13,811

10,615

12,648

8,973

5,312

7,231

4,811

Cash

23,795

36,829

33,635

18,333

32,735

33,457

14,220

Debtors and other

25,086

21,048

19,050

13,515

12,993

10,547

8,334

Current liabilities

(35,254)

(39,641)

(38,658)

(16,555)

(25,531)

(24,942)

(6,996)

Other current liabilities inc short positions

(2,694)

(3,341)

(6,018)

(1,840)

(1,011)

(1,915)

(1,312)

Trade and other payables

(32,560)

(36,300)

(32,640)

(14,715)

(24,520)

(23,027)

(5,684)

Non-current liabilities

(880)

(366)

(263)

(5,219)

(5,086)

(4,436)

(4,187)

Net assets

27,183

29,748

27,591

24,658

25,625

26,987

21,756

CASH FLOW

 

 

 

 

 

 

 

 

Operating cash flow

(465)

6,917

3,168

(1,818)

5,474

5,853

(808)

Working capital and other items

(1,387)

13,490

1,558

(9,051)

11,636

1,521

(11,378)

Tax paid

(2,533)

(1,334)

(1,664)

(351)

(99)

(783)

(650)

Net cash from operating items

(4,385)

19,073

3,062

(11,220)

17,011

6,591

(12,836)

Fixed asset investment

(272)

(378)

(280)

(197)

(41)

(150)

(138)

Acquisitions/disposals

0

0

0

(140)

0

0

(100)

Other investing activities

93

23

90

90

24

4

65

Share (purchase)/issuance

(438)

(549)

(2,353)

(1,277)

(1,960)

(3,067)

(3,400)

Ordinary dividends

(4,367)

(5,201)

(3,573)

(2,485)

(1,027)

(1,922)

(2,048)

Other financing

58

66

62

(73)

395

(734)

(780)

Net cash flow

(9,311)

13,034

(2,992)

(15,302)

14,402

722

(19,237)

Opening net (debt)/cash

33,106

23,795

36,627

33,635

18,333

32,735

33,457

Closing net (debt)/cash

23,795

36,829*

33,635

18,333

32,735

33,457

14,220

Source: Cenkos Securities, Edison Investment Research. Note: *A change in accounting policy relating to EBT and SIP in 2019 was applied retrospectively to 2018 and results in a small mismatch between closing net cash in 2017 and opening net cash in 2018.


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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Foxtons’ new CEO has identified historical failings that are expected to be addressed by upgrades to data infrastructure, investment in staff and a reinvigoration of the Foxtons brand. If successful, over the medium term Foxtons expects margins to expand 500bp and hopes that operating profit will more than double. Importantly, it aims to increase the proportion of recurring income from c 65% currently, thereby reducing cyclical income and increasing the quality of income. We have raised our FY23 EPS estimates by c 8%, reflecting the latest M&A. Our ‘base’ case valuation rises to 59p and our preferred ‘bull’ case valuation rises from 118p to 124p.

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