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Currency in GBP
Last close As at 26/05/2023
GBP3.34
▲ −0.50 (−0.15%)
Market capitalisation
GBP367m
Research: Financials
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.
Numis |
Markets still subdued but diversification helps |
H123 trading update |
Financial services |
4 April 2023 |
Share price performance
Business description
Next events
Analysts
Numis is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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.
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Exhibit 1: LSE Main Market issuance (money raised) |
Exhibit 2: LSE AIM issuance (money raised) |
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|
|
Source: London Stock Exchange (last data February) |
Source: London Stock Exchange (last data February) |
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Exhibit 1: LSE Main Market issuance (money raised) |
|
|
Source: London Stock Exchange (last data February) |
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Exhibit 2: LSE AIM issuance (money raised) |
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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.
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Exhibit 3: LSE average daily value traded (£m) |
Exhibit 4: UK equity indices |
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|
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Source: London Stock Exchange (Main Market order book & AIM) |
Source: Refinitiv, CBOE indices |
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Exhibit 3: LSE average daily value traded (£m) |
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|
Source: London Stock Exchange (Main Market order book & AIM) |
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Exhibit 4: UK equity indices |
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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.
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Exhibit 7: 10-year history of the price to book value ratio for Numis |
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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 |
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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) |
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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% |
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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
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