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Research: Financials
Cenkos Securities’ H117 result was strong with a pre-tax profit increase of over 150% bolstered by the Eddie Stobart IPO, which provided further evidence of the company’s ability to complete larger transactions as well as a flow of smaller deals. The second half has started well and, subject to market conditions, the pipeline is reported to be healthy. Our FY17 earnings estimate has been increased by nearly 11%. Revenue and profit are subject to market fluctuations but the business model of contained fixed costs and high variable compensation mitigates the impact of this. The valuation both in terms of P/E and yield appears cautious.
Written by
Cenkos Securities |
Making hay when the sun shines |
H117 results |
Financial services |
6 October 2017 |
Share price performance
Business description
Next events
Analysts
Cenkos Securities is a research client of Edison Investment Research Limited |
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Cenkos Securities’ H117 result was strong with a pre-tax profit increase of over 150% bolstered by the Eddie Stobart IPO, which provided further evidence of the company’s ability to complete larger transactions as well as a flow of smaller deals. The second half has started well and, subject to market conditions, the pipeline is reported to be healthy. Our FY17 earnings estimate has been increased by nearly 11%. Revenue and profit are subject to market fluctuations but the business model of contained fixed costs and high variable compensation mitigates the impact of this. The valuation both in terms of P/E and yield appears cautious.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
88.5 |
27.0 |
35.2 |
17.0 |
3.3 |
14.5 |
12/15 |
76.5 |
19.9 |
27.2 |
14.0 |
4.3 |
12.0 |
12/16 |
43.7 |
4.4 |
4.7 |
6.0 |
24.9 |
5.1 |
12/17e |
58.0 |
8.4 |
12.4 |
11.0 |
9.4 |
9.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H117 results
Cenkos’ first half revenues increased by more than 90% from H116 and were 3% ahead of the stronger H216, reflecting the contribution from fees generated by the £386m Eddie Stobart Logistics IPO and a generally improved market background that fed into strong market-making profits. Continuing pressure on commission rates meant that corporate broking, research and commission revenue was down 15%. Variable compensation contributed to an 82% increase in costs from H116, which still left pre-tax profits (£4.2m) 156% up on the prior year period and, with the benefit of a lower tax charge, earnings per share were five times last year’s level at 6.1p. The interim dividend proposed is 4.5p compared with 1.0p.
Outlook
Equity market levels have risen substantially since June last year (FTSE All-Share total return index +19%) and sustained higher levels despite a range of uncertainties surrounding Brexit and global geopolitical developments. While this remains the case the environment for transactions is supportive and Cenkos has already undertaken a number of significant fund-raisings in the second half and reports a good pipeline of potential transactions. In 2018 the implementation of MiFID II is generally expected to exert further downward pressure on commission income (part of the 15% of H117 revenues from corporate broking, research and commission). In the longer term, Cenkos’ flexible cost base, its track record in completing transactions for both SME and larger companies and the breadth of its 120-strong client base are positive features.
Valuation
Both yield and P/E multiple appear attractive, even allowing for the equity market sensitivity of earnings and dividends. An ROE/COE based valuation (page 3) points to a valuation of 194p (previously 189p).
H117 results review
Exhibit 1 gives a P&L analysis for the first half. Salient points are as follows, with percentage changes from H116 unless stated.
■
Within the 91% revenue increase, corporate finance and placing fees together with market making were the positive drivers. As noted earlier, the Eddie Stobart IPO was a significant contributor (one client is identified as contributing £10.59m). Market-making revenue included benefits from gains on shares and warrants received in lieu of fees of £1.29m (H116 loss £1.63m).
■
The cost increase of 82% was the result of higher variable compensation together with costs arising from an extensive exercise to strengthen systems and controls following regulatory breaches reported last year in relation to Cenkos’ provision of sponsor services. Investment has also been made in preparation for MiFID II and the Senior Managers and Certification Regime.
■
A reduction in tax charge amplified the 156% pre-tax profit increase to 406% at the EPS level.
■
The dividend was increased by 350% to 4.5p and Cenkos notes that since flotation it has made cash returns to shareholders (dividends and share buybacks) of 160.8p (or 165.3p once the interim dividend has been paid).
Exhibit 1: H117 Profit and loss analysis
£000s |
H116 |
H216 |
H117 |
% change |
% change sequentially |
Corporate finance & placing fees |
9,675 |
20,045 |
21,209 |
119% |
6% |
Corporate broking, research, and commission |
5,106 |
5,399 |
4,351 |
-15% |
-19% |
Market making |
563 |
2,957 |
3,689 |
555% |
25% |
Total revenue |
15,344 |
28,401 |
29,249 |
91% |
3% |
Recurring Administration expenses |
(13,726) |
(25,700) |
(25,032) |
82% |
-3% |
Operating profit / loss |
1,618 |
2,701 |
4,217 |
161% |
56% |
Investment income |
32 |
51 |
8 |
-75% |
-84% |
Pre-tax profit |
1,650 |
2,752 |
4,225 |
156% |
54% |
Tax |
(997) |
(861) |
(904) |
-9% |
5% |
Attributable profit |
653 |
1,891 |
3,321 |
409% |
76% |
EPS (p) |
1.2 |
3.4 |
6.1 |
406% |
79% |
DPS (p) |
1.0 |
5.0 |
4.5 |
350% |
-10% |
Source: Cenkos Securities, Edison Investment Research
Since the beginning of the year there have been several board changes. In May Nick Wells stood down from the board but remains with the company, focusing on developing the corporate finance operations. Jim Durkin, a founder shareholder in Cenkos, retired as chief executive and director at the beginning of August, with his role assumed by existing non-executive director Anthony Hotson. Hotson has substantial financial sector experience including roles at the Bank of England, SG Warburg and Henderson Group. He joined the board in May 2012, so has a good understanding of the culture of the business. Finance director Mike Chilton also resigned as a director in August and Philip Anderson, previously at Curo Financial Technologies and Virgin Money Holdings, has been appointed as finance director.
In the next table we have collated the placing and IPO transactions highlighted on the company’s website (it excludes tap issues for investment companies, for example). This confirms the comments made about a good start to the second half, with the total raised for clients so far totalling £523m. This compares with the £702m shown here for the first half (the actual first half total raised including other transactions not recorded here was £982m).
Exhibit 2: Highlights of completed transactions for 2017 year to date
Month |
Company |
Transaction |
Consideration |
February |
Kromek Group |
Placing |
£21m |
Mercia Technologies |
Placing |
£40m |
|
GCP |
C share issue |
£79m |
|
Cello Group |
Placing |
£15m |
|
UP Global Sourcing Hldgs |
IPO |
£53m |
|
March |
Collagen Solutions |
Placing |
£8m |
88 Energy Ltd |
Placing |
A$17m |
|
Totally |
Placing |
£18m |
|
Frontier IP Group |
Placing |
£3m |
|
April |
Corero |
Placing |
£5.6m |
Salt Lake Potash |
Fundraise |
£7.5m |
|
Eddie Stobart |
IPO |
£386m |
|
May |
Rosslyn Data Technologies |
Placing and acquisition |
£5m |
UK Oil and Gas |
Placing |
£6.5m |
|
June |
Plastics Capital |
Placing |
£3.7m |
1PM |
Placing |
£13m |
|
Flow Group |
Equity placing and loan note subscription |
£26.6m |
|
July |
Angling Direct |
IPO |
£9m |
Hurricane Energy |
CV bond placing |
US$230 |
|
Hurricane Energy |
Equity placing |
US$300 |
|
Arena Intl Events |
IPO |
£60m |
|
August |
TP Group |
Placing |
£21.85m |
Marlowe |
Placing |
£10m |
|
Rotala |
Placing |
£3.5m |
|
FairFX |
Placing |
£27.7m |
Source: Cenkos Securities website
Financials
Our FY17 estimate is increased to reflect the H117 performance and commentary on trading since the half-year end. Our revenue estimate is increased from £52m to £58m and this translates into pre-tax profits of £8.4m compared with £7.8m previously and EPS of 12.4p versus 11.2p. Our full year estimates are set out in more detail in the financial summary table (Exhibit 3).
There was a cash outflow of £4m in the first half, with an operating cash inflow of £1m before working capital items offset by working capital and tax outflows (£1.9m), and a dividend payment of £2.7m, while other items absorbed £0.4m. This left cash and cash equivalents (no debt) of £19.8m at the end of June.
Valuation
In our previous note we derived a valuation based on a simple ROE/COE model using an assumed sustainable ROE of 24% (in line with our current FY17 estimates) and a growth rate of 5%. On the same assumptions, applied to the slightly higher H117 NAV, the implied value is 194p (previously 189p). Alternatively, the current share price would imply an ROE of c 17%, which seems cautious given the average over the last five years has been 36%.
Exhibit 3: Financial summary
£000s |
2014 |
2015 |
2016 |
2017e |
||
Year end 31 December |
||||||
PROFIT & LOSS |
||||||
Revenue |
|
|
88,516 |
76,513 |
43,745 |
58,000 |
Cost of Sales (excl. amortisation and depreciation) |
(61,318) |
(56,510) |
(39,244) |
(49,439) |
||
EBITDA |
|
|
27,198 |
20,003 |
4,501 |
8,560 |
Depreciation |
|
|
(386) |
(241) |
(182) |
(200) |
Amortisation |
0 |
0 |
0 |
0 |
||
Operating Profit (before amort. and except.) |
|
26,812 |
19,762 |
4,319 |
8,361 |
|
Exceptionals |
0 |
0 |
0 |
0 |
||
Non-recurring items |
0 |
0 |
0 |
0 |
||
Investment revenues |
160 |
134 |
83 |
50 |
||
Profit Before Tax (norm) |
|
|
26,972 |
19,896 |
4,402 |
8,410 |
Tax |
(5,644) |
(4,525) |
(1,858) |
(1,682) |
||
Profit After Tax (norm) |
|
|
21,328 |
15,371 |
2,544 |
6,728 |
Minority Interests |
0 |
0 |
0 |
0 |
||
Average number of shares outstanding (m) |
60.5 |
56.5 |
54.7 |
54.2 |
||
EPS - normalised fully diluted (p) |
|
|
35.2 |
27.2 |
4.7 |
12.4 |
Fully diluted EPS (p) |
|
|
33.5 |
26.8 |
4.6 |
12.4 |
Dividend per share (p) |
17.00 |
14.00 |
6.00 |
11.00 |
||
NAV per share (p) |
0.65 |
0.53 |
0.50 |
0.55 |
||
ROE (%) |
60% |
43% |
10% |
24% |
||
Cost/income ratio |
69.7% |
74.2% |
90.1% |
85.6% |
||
Staff costs/Revenue |
64.8% |
58.8% |
60.1% |
69.2% |
||
BALANCE SHEET |
||||||
Non-current assets |
|
|
2,463 |
1,626 |
625 |
675 |
Intangibles and goodwill |
0 |
0 |
0 |
0 |
||
Property, plant and equipment |
421 |
296 |
389 |
439 |
||
Other non-current assets |
2,042 |
1,330 |
236 |
236 |
||
Current assets |
|
|
63,392 |
64,725 |
62,692 |
64,424 |
Other current assets inc Investments - long positions |
10,014 |
12,706 |
13,811 |
13,811 |
||
Cash |
32,932 |
33,106 |
23,795 |
28,053 |
||
Debtors and other |
20,446 |
18,913 |
25,086 |
22,560 |
||
Current liabilities |
|
|
(26,294) |
(37,432) |
(35,254) |
(35,254) |
Other current liabilities inc short positions |
(2,711) |
(2,551) |
(2,694) |
(2,694) |
||
Short-term borrowings |
0 |
0 |
0 |
0 |
||
Other current liabilities |
(23,583) |
(34,881) |
(32,560) |
(32,560) |
||
Non-current liabilities |
|
|
0 |
(351) |
(880) |
(880) |
Long-term borrowings |
0 |
0 |
0 |
0 |
||
Other long-term liabilities |
0 |
(351) |
(880) |
(880) |
||
Net assets |
|
|
39,561 |
28,568 |
27,183 |
28,965 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
24,137 |
15,538 |
(465) |
9,060 |
Working capital and other items |
(7,344) |
16,184 |
(1,387) |
2,526 |
||
Tax paid |
(4,815) |
(5,049) |
(2,533) |
(1,682) |
||
Net cash from operating items |
|
|
11,978 |
26,673 |
(4,385) |
9,904 |
Fixed asset investment |
(420) |
(174) |
(272) |
(250) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Other investing activities |
173 |
191 |
93 |
50 |
||
Share (purchase)/issuance |
244 |
(16,823) |
(438) |
0 |
||
Ordinary dividends |
(9,386) |
(9,740) |
(4,367) |
(5,445) |
||
Other financing |
0 |
47 |
58 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Net cash flow |
2,589 |
174 |
(9,311) |
4,258 |
||
Opening net (debt)/cash |
|
|
30,343 |
32,932 |
33,106 |
23,795 |
FX |
0 |
0 |
0 |
0 |
||
Closing net (debt)/cash |
|
|
32,932 |
33,106 |
23,795 |
28,053 |
Source: Edison Investment Research, Cenkos Securities accounts
|
|
Research: TMT
Nanoco’s planned raise of £8.6m (subject to approval) should remove a major constraint on the company’s ability to execute its strategy. The balance sheet strength should support customer negotiations at both the developmental level and as it moves towards volume shipments. The ability to attract and retain good staff and the ability to monetise and protect its IP both in display and beyond should also benefit, albeit at the expense of 20% dilution.