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Research: Financials
The timing and size of transactions falling into the second half of FY18 has meant that Numis has achieved a record level of revenue but not reached our earlier estimate for FY18. The decision to undertake a significant investment in additional senior staff has also affected earnings, but is set to underpin the franchise and could help generate positive earnings surprises in future years. The deal pipeline is described as very strong so, subject to market conditions, we look for a rebound in earnings for FY19.
Written by
Numis Corporation |
Investing to underpin future growth |
FY18 trading update |
Financial services |
28 September 2018 |
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The timing and size of transactions falling into the second half of FY18 has meant that Numis has achieved a record level of revenue but not reached our earlier estimate for FY18. The decision to undertake a significant investment in additional senior staff has also affected earnings, but is set to underpin the franchise and could help generate positive earnings surprises in future years. The deal pipeline is described as very strong so, subject to market conditions, we look for a rebound in earnings for FY19.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
112.3 |
32.5 |
22.4 |
12.0 |
16.7 |
3.2 |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
14.4 |
3.2 |
09/18e |
133.7 |
27.9 |
19.8 |
12.0 |
18.9 |
3.2 |
09/19e |
147.7 |
36.3 |
25.8 |
12.0 |
14.5 |
3.2 |
Note: *PBT and EPS are diluted on a reported basis.
FY18 trading update
Numis indicates that full year revenue for FY18 was approximately 3% ahead of FY17. While activity levels were strong in the second half, the timing of transactions for corporate broking and advisory, and lower average values on those completed in the period meant that second half revenues were lower than we had estimated. In H218 the equities business broadly matched its first half performance and, encouragingly, MiFID II does not appear to have had an adverse impact on the business, reflecting the strength and breadth of the service offered to institutional clients. The other area highlighted by the group is an ‘unprecedented period’ of senior staff hiring. The overall headcount has increased by 16% and the impact on costs is magnified by the need to match incentive packages at previous employers.
Pipeline strong and capabilities strengthened
Looking ahead, the fluctuation in the incidence and size of deals that affected H218 is a normal feature in markets and the group points to a very strong near-term pipeline which, paired with the momentum in the equities business, should help provide a good start to FY19 and support the near-term market share gain that management looks for. On a longer view, the investment in senior staff should contribute to a broadening and deepening of the group’s capabilities and hence enhance potential earnings through market cycles.
Valuation: Potential for earnings rebound in FY19e
Reflecting the combination of a lower revenue expectation and higher assumed costs, our FY18 EPS estimate is now 24% lower but, given the indication of a very strong pipeline, the reduction is a more modest 5% for FY19. As a result, while the multiple for FY18e looks high relative to previous assumptions, on our estimates earnings are set to rebound strongly in FY19e, reducing the following year multiple with the potential for enhanced growth thereafter as the investment in staff generates income.
Estimate revisions
We show changes in key numbers from our estimates below and further detail on the estimates is shown in the financial summary.
Within the revenue estimate, the main reduction is in corporate broking and advisory. As noted, this reflects the timing and size of transactions that completed in H218 and FY18 revenues will be ahead of the prior year. Equities revenue is also indicated to be ahead of FY18. Management reports a very strong pipeline of transactions and we assume that a number of these will have fallen into the early part of FY19 rather than FY18, potentially providing a very strong start to the year for corporate broking and advisory.
On costs, we have assumed that the 16% increase in headcount, allowing for phasing of hiring, gives rise to an increase in total staff costs of c 11% with a more moderate increase for FY19e.
The overall outcome is a 24% reduction in earnings estimate for FY18 and a 5% reduction for FY19, a number which is subject to normal market uncertainties. As noted above, the investment in senior staff should strengthen the Numis franchise, increasing the potential for future growth and the firm’s value on a long view.
Exhibit 1: Estimate revisions
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
|||||||||
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
|
09/18e |
144.5 |
133.7 |
-7.5% |
37.8 |
27.9 |
-26.1% |
26.2 |
19.8 |
-24.4% |
12.0 |
12.0 |
0.0% |
09/19e |
147.7 |
147.7 |
0.0% |
38.6 |
36.3 |
-5.8% |
27.3 |
25.8 |
-5.4% |
12.0 |
12.0 |
0.0% |
Source: Edison Investment Research
Exhibit 2: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018e |
2019e |
||
Year end 30 September |
|||||||
PROFIT & LOSS |
|||||||
Revenue |
|
|
97,985 |
112,335 |
130,095 |
133,704 |
147,670 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(92,631) |
(100,673) |
||
Share based payment |
(4,104) |
(6,229) |
(10,454) |
(12,500) |
(10,000) |
||
EBITDA |
|
|
28,863 |
29,986 |
36,015 |
28,573 |
36,997 |
Depreciation |
|
|
(882) |
(1,126) |
(1,226) |
(1,200) |
(1,200) |
Amortisation |
(111) |
(125) |
(89) |
(35) |
(20) |
||
Operating Profit (before amort. and except). |
|
|
27,870 |
28,735 |
34,700 |
27,338 |
35,777 |
Net finance income |
190 |
37 |
188 |
50 |
60 |
||
Other operating income |
(1,978) |
3,759 |
3,431 |
500 |
500 |
||
Profit before tax |
|
|
26,082 |
32,531 |
38,319 |
27,888 |
36,337 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(5,195) |
(7,193) |
||
Profit after tax (FRS 3) |
|
|
21,549 |
26,399 |
30,377 |
22,693 |
29,144 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
114.7 |
113.0 |
||
EPS - basic (p) |
19.5 |
23.5 |
27.4 |
21.3 |
27.8 |
||
EPS - diluted (p) |
|
|
18.3 |
22.4 |
25.9 |
19.8 |
25.8 |
Dividend per share (p) |
11.50 |
12.00 |
12.00 |
12.00 |
12.00 |
||
NAV per share (p) |
102.0 |
113.5 |
125.0 |
127.6 |
137.4 |
||
ROE (%) |
19% |
22% |
23% |
17% |
21.0% |
||
EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
21.4% |
25.1% |
||
Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
20.4% |
24.2% |
||
BALANCE SHEET |
|||||||
Fixed assets |
|
|
6,724 |
5,522 |
6,147 |
7,188 |
6,658 |
Current assets |
|
|
279,114 |
312,462 |
407,850 |
359,152 |
367,047 |
Total assets |
|
|
285,838 |
317,984 |
413,997 |
366,340 |
373,705 |
Current liabilities |
|
|
(170,319) |
(188,895) |
(280,371) |
(231,146) |
(231,146) |
Long term liabilities |
0 |
(12) |
0 |
(11) |
(11) |
||
Net assets |
|
|
115,519 |
129,077 |
133,626 |
135,183 |
142,548 |
CASH FLOW |
|||||||
Operating cash flow |
|
|
6,467 |
48,735 |
43,369 |
30,519 |
35,054 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(990) |
(380) |
||
Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(34,737) |
(31,779) |
||
Net cash flow |
|
|
(14,675) |
29,239 |
6,812 |
(5,208) |
2,895 |
Opening net (cash)/debt |
|
|
(74,518) |
(59,591) |
(89,002) |
(95,852) |
(90,452) |
FX effect |
|
|
(252) |
172 |
38 |
(192) |
0 |
Closing net (cash)/debt |
|
|
(59,591) |
(89,002) |
(95,852) |
(90,452) |
(93,347) |
Source: Edison Investment Research, Numis Corporation accounts
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We had the opportunity to join Smith & Nephew’s (S&N) recent institutional investor roadshow and hear about the introspection that has emerged following the appointment of its new CEO. While endorsing its strategy as a portfolio medical device company, two strategic reviews have identified areas which, when the detail is announced at the Q3 and FY18 results, will enable investors to track S&N’s target of returning to market growth rates.