Numis Corporation — Investing to broaden the income base

Exhibit 1 provides a summary of the half- and full-year figures for FY20 and FY21 with additional comments noted below. Figures are compared with the prior year period unless stated.

Group revenue for FY21 was up 39% with the largest increase (+£53m) in investment banking. Within this, capital markets and advisory were the main contributors, reflecting the revival in IPO and M&A activity following a COVID-induced hiatus, growth in the private markets activity (the Growth Capital Solutions team within capital markets) and a significant increase in average deal fees earned by Numis (these have doubled since FY19). Higher average deal fees were generated by larger deal sizes and more senior positions in transactions, an indication of a strengthening in Numis’s reputation. The larger deal size in part reflects the increase in quality of the retained client base; while Numis does not regard size alone as an indicator of client quality, the average market capitalisation of its retained corporate clients has increased to £1.4bn, an increase of 88% over five years, and includes 66 FTSE 350 companies. The year-end number of retained clients at 182 versus 188 was affected by acquisitions of clients and a post-pandemic reduction in the opportunities to pitch for new clients. This left corporate retainer income slightly lower, but higher M&A activity contributed to a 177% (£19.7m) increase in advisory revenue arising from work for both retained and non-retained clients. Not shown in the table below, but private markets transaction revenue accounted for more than £20m or 18% of capital markets revenue and, as with the advisory team, there has been recruitment to support the increased level of activity and potential for growth.

Within the equities business, institutional income benefited from market share gains, with the number of institutional clients increasing despite post-Brexit limitations on access to EU clients. The new electronic trading product has progressed and is expected to account for a growing proportion of institutional income. Research income was at a similar level to the prior year and Numis believes the market has now generally stabilised following the implementation of MiFID II in 2018. Trading income was up 23% from a strong FY20 with a weighting to the first half. The net trading gains of nearly £20m compare with the £9m average of the prior five years, reflecting periodic volatility during the year (although below the levels seen in FY20), a relatively strong performance by mid- and small-cap stocks and an increase in trading book limits.

The other operating income line comprised gains of £8.7m in the investment portfolio, which was valued at £21.8m at the year end (versus £14.7m FY20). The gains mainly arose from holdings in Oxford Nanopore Technologies (DNA/RNA sequencing devices) and Wiz Inc (cyber security). Numis invested in Oxford Nanopore Technologies 12 years ago and acted for the company in its IPO at the end of September; Numis has since sold its entire holding. The investment in Wiz was made during FY21 and is an example of a move to later-stage investments that are aligned with its private market activity and can benefit from Numis’s network and experience. Remaining legacy and fund investments are being progressively sold, with the aim being to have a broadly stable number of holdings through reinvestment.

Administrative expenses increased by 25%, including a 26% increase in total staff costs (or 30% excluding share-based payments) mainly reflecting higher variable remuneration given the increase in pre-bonus profitability. The year-end headcount was 9% higher at 319 and the average increased by 3.5%. Staff additions mainly comprised junior and mid-level roles in investment banking. At 50.4%, the compensation ratio was at the lower end of the target range of 50–60%. Non-staff costs increased by 21% including higher occupancy costs arising from the move to a new London office (there was a reduced one-off cost of £0.4m related to this compared with £1.3m in FY20). Data service costs rose with headcount and there were professional fees relating to the EU licence application for the Dublin office. Ongoing non-staff costs for this office are expected to be £1.5m.

This left operating profits more than double the FY20 level and the operating margin, before other income at 31.4% versus 23.6%. Pre-tax profit increased by 100% and diluted EPS by 84%.

Numis had maintained a stable full-year dividend at 12p since FY16, but has made an upward adjustment to 13.5p (8p final dividend) for FY21. The move follows a reassessment by the board, which took into account resilience shown by the business through market cycles and the progress in implementation of the group’s strategy in FY21 and prior years. The board sees the increase as consistent with investing to support growth.

The group remains committed to returning excess cash to shareholders and mitigating the dilutive impact of share awards. During FY21, on-market purchases of shares were sharply reduced (£1.6m versus £5.4m) as the purchase of shares for the employee benefit trust increased (to £22.7m versus £4.3m), which was related to the vesting of FY16 Long Term Incentive Plan (LTIP) awards. This vesting pushed up the share count at the year end and the group intends to increase on-market buybacks of shares to prior levels to offset the dilutive effect over a period.

The group adheres to its five strategic strands while evolving as openings emerge.

Exhibits 2 and 3 show calendar-year figures for total issuance for the London Stock Exchange Main and AIM markets since 2007; the 2021 figures are for the period to end-November. On the Main Market, the number of new issues for 2021 to end November was sharply higher than in 2020 but total money raised was below the prior year period when funds were being raised to support company balance sheets following the onset of the pandemic. For AIM, the pattern has been different with a smaller increase in 2020 issuance followed by a rise in 2021 as the market rotated towards smaller- and mid-cap stocks with growing confidence in economic recovery. Like the Main Market, AIM new issues have increased significantly from a low point in 2019. Mirroring this, Numis acted for clients in 12 IPOs in FY21 compared with one in FY20.

To provide longer-term context, the level of money raised on the Main Market in 2020 and 2021 was well below the exceptional levels seen during the global financial crisis when large financial institutions on the Main Market required recapitalisation. In the case of AIM, issuance has been running well below the immediate pre-financial-crises level (£16bn in 2007).

Exhibit 4 illustrates the recent performance of UK equity indices. The strong recovery from the pandemic-induced fall last year is clear, with a more marked pick-up for smaller-cap stocks evident since late 2020 as noted above. Both indices have seen a softer performance more recently. The next chart shows the daily value traded on the London Stock Exchange order book and on AIM. The Main Market showed a sharp spike with the onset of the pandemic, but AIM activity following later as interest rotated towards smaller-cap or risker stocks. Both have seen a more recent decline towards more normal levels.

Turning to Numis’s performance in the first two months of FY22, the company reports that revenue was broadly in line with H221 (c £13.7m per month). Exhibit 6 shows selected transactions that made a contribution, demonstrating a continuation of activity with roles on four IPOs (including one on Nasdaq Stockholm). Nevertheless, Numis acknowledges that market uncertainties could have an impact on the timing of execution of the capital markets pipeline in H122.

There is greater confidence over the activity level in the UK M&A and global private markets, both areas where Numis also sees good potential for longer-term growth following the progress already demonstrated in the FY21 results.

We discuss our estimate assumptions and outputs in the next section.

We have reviewed our FY22 estimates and made only modest adjustments. Our assumptions for FY22 are tentative at this early stage in the year, and this point is underlined by Numis’s caution over the timing for potential IPOs and other capital markets transactions in the pipeline. We have allowed for some normalisation in activity levels compared with FY21 on the basis that there may well be a quieter phase in activity. Nevertheless, the revenue run rate for the first two months (only) would, if maintained, imply a lower outcome with revenue of c £165m versus our £181m estimate (see Exhibit 7 for analysis).

On expenses, we have allowed for a further increase in staff numbers in FY22 to support growth in the new Dublin office, in advisory, the private markets team and in the US. Some double running costs will drop out in FY22 following the recent move to the new headquarters, but other non-staff costs will be higher, including costs related to the Dublin office, the new London office and higher travel and entertainment spending following the end of lockdown restrictions.

Changes in the headline numbers from our forecasts are shown below, with further detail from the new forecast given in the financial summary table (Exhibit 11). As can be seen, EPS increases marginally and the only material change in our FY22 estimates is adjusting the dividend to the new level set for FY21.

Numis ended the year with no debt drawn and end-September cash and cash equivalents of £134.1m compared with £125.2m at the end of FY21. The average level of cash during the year was £115m versus £83m and the variance between daily high and low cash positions was £77m. The group also continues to have significant excess capital for regulatory purposes, which it regards as providing long-term stability and strategic flexibility. Numis notes that the UK Investment Firms Prudential Regime (IFPR) will take effect from the beginning of calendar 2022 and that its capital requirement under the new regulation will be subject to an FCA review of the internal assessment so there will be no immediate impact. The establishment of a regulated entity in Ireland and the addition of US ECM to the US office’s offering will give rise to a modest increase in capital requirement.

Turning to cash flow, there was a net cash inflow from operations of £58m including a negative working capital movement of £14m. Capital spending absorbed nearly £9m, a sharp increase on the previous five-year average of under £1m because of the fit-out costs of the new London office. Share repurchases and dividend payments absorbed £37m and, with other smaller items accounting for another £3m, in total there was a net cash inflow of £9m.

We have updated our peer comparison table showing UK investment banks/brokers, and US and European investment banks and advisory firms in Exhibit 9.

Comparison is limited by the fact that most other UK companies lack consensus estimates and that there are different year ends across the peers. Nevertheless, we note that Numis offers a high yield relative to the non-UK companies, its P/E ratios are below the averages for the US/EU investment banks and advisory firms and its ROE is high in the range.

The chart below shows a 10-year history of the price to book ratio for Numis. The current value is 1.9x, just below the 10-year average of 2.1x. Using an ROE/COE model to infer the ROE required to match the share price at time of writing (319p) gives a value of 15.3%: less than half the 34% reported in FY21 and also below the 21% five-year historical average, the 18% 10-year average and our FY22 estimate, also 18%. While the market may be taking a cautious view, given the very strong performance seen in the last two years and near-term uncertainties, it can be argued that the strategic progress the group has made is not being fully captured in this valuation.