Numis Corporation — Markets still subdued but diversification helps

Numis Corporation (LSE: NUM)

Last close As at 22/06/2024

GBP3.43

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Market capitalisation

GBP402m

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Research: Financials

Numis Corporation — Markets still subdued but diversification helps

UK equity capital market (ECM) activity has remained subdued and Numis does not expect a near-term revival. Nevertheless, its strategy of investing in diversification is bearing fruit with M&A advisory showing continued strength and private markets transactions showing signs of picking up. Numis’s strong balance sheet allows it to take opportunities to recruit and maintain investment in technology in the downcycle. This should pay dividends in a stronger market and underpin longer-term growth.

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Financials

Numis

Markets still subdued but diversification helps

H123 trading update

Financial services

4 April 2023

Price

212p

Market cap

£233m

Net cash (£m) at 30 September 2022

105.7

Shares in issue

110.0m

Free float

75%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.2)

12.7

(16.3)

Rel (local)

(2.9)

10.5

(15.6)

52-week high/low

295p

170p

Business description

Numis Corporation is one of the UK's leading independent investment banking groups, offering a full range of research, execution, equity capital markets, corporate broking and advisory services. At the end of September 2022, it employed 336 staff in offices in London, Dublin and New York and had 176 corporate clients.

Next events

H123 results

May 2023

Analysts

Andrew Mitchell

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

Numis is a research client of Edison Investment Research Limited

UK equity capital market (ECM) activity has remained subdued and Numis does not expect a near-term revival. Nevertheless, its strategy of investing in diversification is bearing fruit with M&A advisory showing continued strength and private markets transactions showing signs of picking up. Numis’s strong balance sheet allows it to take opportunities to recruit and maintain investment in technology in the downcycle. This should pay dividends in a stronger market and underpin longer-term growth.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/20

154.9

37.1

26.7

12.0

7.9

5.7

09/21

215.6

74.2

49.1

13.5

4.3

6.4

09/22

144.2

20.9

11.9

13.5

17.8

6.4

09/23e

135.2

15.3

10.7

13.5

19.8

6.4

Note: *PBT and EPS are on a reported basis and EPS is fully diluted.

ECM activity low, M&A and private markets brighter

In its first-half trading update (for the period to end March), Numis indicated that revenue is likely to be in the region of £64m, about 14% below H122 and 9% below H222. The main brake on revenue is the very low level of UK ECM transactions, which is affecting capital markets revenue. Within this area the private markets business has seen a pick-up in its deal activity and pipeline, providing a partial offset (one transaction was a $300m raise for cybersecurity company Wiz, giving it a c $10bn valuation). M&A has seen continued momentum and advisory revenues reached a first half record. Within equities, weak investor sentiment towards the UK and fund outflows for domestically focused institutions have reduced institutional revenues and difficult market conditions have trimmed net trading gains.

Outlook and estimates

The market background for UK ECM activity remains weak; Numis does not expect a meaningful change in conditions in the near term or a revival in the IPO market before its September year end. Positively, the outlook for the M&A advisory business is encouraging with a good pipeline of buy and sell-side mandates reflecting Numis’s strength in the UK mid-market. The improved private markets pipeline may mean an increased contribution to capital markets revenue. Our estimate for FY23 is reduced to reflect the weaker near-term ECM outlook, with EPS at 10.7p versus 16.8p (see estimate changes section below for more detail).

Valuation

On our revised estimate the P/E multiple would be 19.8x in a year of difficult trading conditions. The shares trade on a price/book multiple of 1.3x, which compares with the 10-year average of 2.1x. The implied return on equity (ROE) of 11.6% is above our 7% forecast for this year, but well below its three-, five- and 10-year averages of 18% or above, which reflect the returns Numis has been able to generate across previous market cycles.

Background

For reference we have updated four charts we use to illustrate the market background for Numis. The first two charts show the very subdued recent level of equity issuance on both the Main Market and AIM. The timing of a revival in capital markets activity is uncertain and, as Numis has noted, given the preparation required for an initial public offering (IPO), new issuance is unlikely to revive before its year end. However, market sentiment can shift rapidly and placings, block trades and debt issuance would be likely to respond more promptly to an improvement in the background.

Exhibit 1: LSE Main Market issuance (money raised)

Exhibit 2: LSE AIM issuance (money raised)

Source: London Stock Exchange (last data February)

Source: London Stock Exchange (last data February)

Exhibit 1: LSE Main Market issuance (money raised)

Source: London Stock Exchange (last data February)

Exhibit 2: LSE AIM issuance (money raised)

Source: London Stock Exchange (last data February)

Trading activity (Exhibit 3) 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 was also evident in the relative performance of the CBOE All-Companies and Small-Cap indices. Since then, trading activity has been relatively subdued, particularly for AIM, although both markets have shown a tick up in more recent readings. The equity indices (Exhibit 4) show reactions to the pandemic, the invasion of Ukraine and its macroeconomic repercussions. The recent trend has been mixed, but, on a six-month view the all-companies and small-cap indices are up 11% and 4%, respectively.

Exhibit 3: LSE average daily value traded (£m)

Exhibit 4: UK equity indices

Source: London Stock Exchange (Main Market order book & AIM)

Source: Refinitiv, CBOE indices

Exhibit 3: LSE average daily value traded (£m)

Source: London Stock Exchange (Main Market order book & AIM)

Exhibit 4: UK equity indices

Source: Refinitiv, CBOE indices

Estimate changes

Changes in the key numbers from our forecasts are shown below, with further detail from the new forecasts given below and in the financial summary table (Exhibit 8). An 11% reduction in our revenue estimate for FY23 translates into a 36% reduction in pre-tax profit and earnings per share. The operational gearing evident here is moderated to some extent by an assumption of lower variable staff costs and allowance for higher financial income, reflecting increased interest rates.

Exhibit 5: Estimate changes

Revenue (£m)

PBT (£m)

Fully diluted EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

09/23e

151.8

135.2

-11.0%

24.0

15.3

-36.0%

16.8

10.7

-36.3%

13.5

13.5

0.0%

Source: Edison Investment Research

Exhibit 6 shows an analysis of our revenue assumptions for FY23 with comparatives for FY19–22. The historical fluctuations in revenues for each of the areas, with the exception of corporate retainers, underlines the considerable uncertainty attached to the estimates.

Exhibit 6: Revenue analysis

Year-end September, £000s

FY19

FY20

FY21

FY22

FY23e

Net trading gains

4,008

16,003

19,754

12,764

10,500

Institutional income

33,317

37,192

40,957

37,314

35,260

Equities

37,325

53,195

60,711

50,078

45,760

Corporate retainers

13,357

13,536

12,471

12,395

12,320

Advisory

12,576

11,146

30,884

39,023

42,000

Capital markets

48,352

77,022

111,516

42,733

35,100

Investment banking

74,285

101,704

154,871

94,151

89,420

Total revenue

111,610

154,899

215,582

144,229

135,180

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 £5m. On another calculation we estimate that even if revenue fell to around £113m, the business would still break even while maintaining its capabilities to service clients and execute transactions when market conditions improved.

Valuation

The chart below shows a 10-year history of the price to book ratio for Numis. The current value of 1.3x is well below the 10-year average of 2.1x.

Exhibit 7: 10-year history of the price to book value ratio for Numis

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 (212p) gives a value of under 11.6%; this is above the 7% earned last year and suggested by our estimate for FY23, but below the three-, five- and 10-year averages of 21%, 18% and 19%, respectively. The shares yield over 6%.


Exhibit 8: Financial summary

£'000s

2017

2018

2019

2020

2021

2022

2023e

Year end 30 September

PROFIT & LOSS

Revenue

 

 

130,095

136,047

111,610

154,899

215,582

144,229

135,180

Administrative expenses (excl. amortisation and depreciation)

(83,626)

(94,603)

(85,432)

(105,327)

(133,651)

(112,275)

(110,530)

Share based payment

(10,454)

(10,583)

(10,914)

(9,961)

(9,634)

(6,345)

(6,600)

EBITDA

 

 

36,015

30,861

15,264

39,611

72,297

25,609

18,050

Depreciation

 

 

(1,226)

(1,113)

(1,124)

(3,016)

(4,416)

(4,794)

(4,858)

Amortisation

(89)

(49)

(44)

(105)

(158)

(302)

(260)

Operating Profit

 

 

34,700

29,699

14,096

36,490

67,723

20,513

12,932

Net finance income

188

212

550

263

(2,288)

1,775

2,400

Non recurring items

0

0

0

0

0

0

(0)

Other operating income

3,431

1,733

(2,210)

310

8,715

(1,432)

0

Profit before tax

 

 

38,319

31,644

12,436

37,063

74,150

20,856

15,332

Tax

(7,942)

(4,967)

(3,110)

(5,713)

(16,303)

(7,153)

(3,467)

Profit after tax (FRS 3)

 

 

30,377

26,677

9,326

31,350

57,847

13,703

11,865

Average diluted number of shares outstanding (m)

117.2

115.8

114.9

117.3

117.7

115.0

111.1

EPS - basic (p)

27.4

25.1

8.8

29.9

54.2

12.4

11.0

EPS - diluted (p)

 

 

25.9

23.0

8.1

26.7

49.1

11.9

10.7

Dividend per share (p)

12.00

12.00

12.00

12.00

13.50

13.50

13.50

NAV per share (p)

125.0

135.0

131.6

150.0

163.3

166.4

165.6

ROE (%)

23%

19%

6.6%

21.2%

33.6%

7.4%

6.5%

EBITDA margin (%)

27.7%

22.7%

13.7%

25.6%

33.5%

17.8%

13.4%

Operating margin (%)

26.7%

21.8%

12.6%

23.6%

31.4%

14.2%

9.6%

BALANCE SHEET

Fixed assets

 

 

6,147

8,215

6,832

12,639

52,641

46,487

40,467

Current assets

 

 

407,850

533,033

326,641

509,034

683,319

576,308

573,104

Total assets

 

 

413,997

541,248

333,473

521,673

735,960

622,795

613,571

Current liabilities

 

 

(280,371)

(398,112)

(195,319)

(361,397)

(509,654)

(396,665)

(396,665)

Long term liabilities

0

0

0

(2,643)

(39,580)

(40,909)

(39,351)

Net assets

 

 

133,626

143,136

138,154

157,633

186,726

185,221

177,555

CASH FLOW

Operating cash flow

 

 

43,369

45,830

(2,748)

65,953

58,330

1,174

25,293

Net cash from investing activities

(198)

(1,014)

(77)

(474)

(9,191)

(1,133)

(808)

Net cash from (used in) financing

(36,359)

(29,035)

(24,646)

(24,451)

(39,857)

(28,240)

(27,689)

Net cash flow

 

 

6,812

15,781

(27,471)

41,028

9,282

(28,199)

(3,204)

Opening net (cash)/debt

 

 

(89,002)

(95,852)

(111,673)

(84,202)

(125,217)

(134,125)

(105,653)

FX effect

 

 

38

40

0

(13)

(374)

(273)

0

Closing net (cash)/debt

 

 

(95,852)

(111,673)

(84,202)

(125,217)

(134,125)

(105,653)

(102,449)

Source: Company data, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Numis and prepared and issued by Edison, in consideration of a fee payable by Numis. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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

General disclaimer and copyright

This report has been commissioned by Numis and prepared and issued by Edison, in consideration of a fee payable by Numis. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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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