Cenkos Securities — Resilient broker with a substantial track record

Cenkos Securities (AIM: CNKS)

Last close As at 04/10/2024

29.00

0.00 (0.00%)

Market capitalisation

GBP15m

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Research: Financials

Cenkos Securities — Resilient broker with a substantial track record

Cenkos has a record of successful fund-raising for clients and maintaining annual profitability since its inception in 2005. This reflects its focus on client outcomes, a well-established network of business relationships and flexibility in its cost base. Its client relationships should stand it in good stead when market conditions become more favourable. In the meantime, the company’s strong balance sheet, with substantial capital headroom, provides reassurance and Cenkos would not need to attain earlier levels of return on equity to warrant a materially higher valuation.

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Financials

Cenkos Securities

Resilient broker with a substantial track record

Initiation of coverage

Financial services

7 November 2019

Price

50.4p

Market cap

£26m

Net cash (£m) at end June 2019

14.7

Shares in issue

56.7m

Free float

68%

Code

CNKS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.7

12.9

(29.5)

Rel (local)

8.0

8.9

(32.9)

52-week high/low

77p

38p

Business description

Cenkos is a leading UK securities business, which acts as nominated advisor, sponsor, broker and financial adviser to companies across all sectors and stages of growth. Since inception in 2005, it has raised more than £19.6bn in equity capital for corporate clients, which currently number 110. There are 114 employees and the business has an approach where fixed costs are contained and variable rewards are closely geared to revenues.

Next events

Trading update

December 2019

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Cenkos Securities is a research client of Edison Investment Research Limited

Cenkos has a record of successful fund-raising for clients and maintaining annual profitability since its inception in 2005. This reflects its focus on client outcomes, a well-established network of business relationships and flexibility in its cost base. Its client relationships should stand it in good stead when market conditions become more favourable. In the meantime, the company’s strong balance sheet, with substantial capital headroom, provides reassurance and Cenkos would not need to attain earlier levels of return on equity to warrant a materially higher valuation.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

59.5

10.0

13.2

9.0

3.8

17.9

12/18

45.0

3.2

4.2

4.5

11.9

8.9

12/19e

32.5

1.0

1.0

4.0

48.2

7.9

12/20e

37.5

3.5

5.0

4.5

10.0

8.9

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

Independent broker with a flexible business model

Founded in 2004, Cenkos began trading in 2005 and from the outset adopted a model under which teams of experienced professionals joined the firm with rewards aligned to the company’s performance and achievement of objectives. This provided motivation and conferred a high degree of cost flexibility, which has moderated the impact of weak market conditions on profits, as currently. The recruitment of experienced staff provided the range of relationships required to build both the corporate and institutional client lists that have underpinned Cenkos’s track record in terms of equity fund-raising (nearly £20bn since 2005).

Trading background and outlook

The impact of domestic and global political uncertainty on UK equity issuance and corporate activity has been marked; London Stock Exchange Main Market money raised increased slightly in 9M19 but the number of new issues fell by 31%, while AIM new issues were down 59% and money raised 31% lower. Secondary trading was 19% lower over the same period and M&A activity has also slowed. Against this background, Cenkos did well to achieve near break-even in its first half, while on our estimates (subject to completion of transactions) it would be profitable in the full year. Our estimate for 2020 assumes some recovery in activity and hence revenues, but not a return to the levels seen in 2017 and 2018. Given the uncertainty over market conditions, we highlight the sensitivity analysis on page 8 which provides an indication of earnings outcomes under different revenue assumptions.

Valuation: Modest ROE assumptions implied

The number of UK peers is limited but within this list Cenkos trades in the range of P/E and price to book multiples, while offering an above average yield. The shares trade at 1x book value, a 10-year low, while an ROE/COE model (page 10) implies that the market is assuming an ROE of 10%, which appears modest in the context of five- and 10-year averages of 28% and 26% respectively.

Independent stockbroker with strong fund-raising record

Cenkos is an independent specialist institutional stockbroking company with offices in London and Edinburgh and c 115 employees. It acts as a nominated adviser, sponsor and financial advisor to 110 client companies diversified by sector and development stage. At its inception in 2005, it brought together a number of teams of experienced market professionals who provided the company with a strong network of institutional and corporate relationships, a characteristic that has been developed since then. This has enabled Cenkos to establish a strong track record for fund-raising including a number of larger transactions in addition to a flow of deals for smaller and midcap clients (see Exhibit 1).

Exhibit 1: Cenkos funds raised by year

Source: Cenkos

Cenkos itself was listed on the AIM market in 2006 and focuses on corporate clients seeking admission to or already listed on the London Stock Exchange Main or AIM markets. The group seeks to maintain long-term relationships with its clients through a focus on understanding their financing needs, maintaining continuity of key staff and delivering good outcomes for them. An indicator of the success of this approach is that nearly 50% of its current corporate clients have been with the firm for more than five years.

Exhibit 2: Cenkos revenue and profit record

Source: Cenkos, Edison Investment Research

A feature of the business since its formation has been a flexible remuneration structure that has rewarded and helped retain teams while containing costs in periods of weaker corporate activity. This has protected the profitability of the business through market fluctuations, as shown in the chart of revenue and pre-tax profit above. The regulatory environment has evolved and the group’s remuneration policy reflects this, with the aim being to align discretionary variable remuneration with the long-term success of Cenkos rather than simply tracking yearly performance. Nevertheless, the company has still demonstrated substantial flexibility of overall costs in response to revenue generation.

Our next table shows Cenkos’s revenue by segment over the last three years with corporate finance accounting for over 70% of the total on average. This income is subject to the timing and size of corporate transactions and variations in the level of these transactions largely explains the substantial moves in overall revenues shown in Exhibit 2, above. Nomad and broking fees have been relatively stable given their recurring nature subject to changes in the number and mix of clients. On a longer view, the client count expanded rapidly post inception with growth then moderating and a modest net erosion has been seen since 2015 (from 125 to 110). Research income has shown a significant fall since 2016 reflecting the impact of MiFID II implementation, together with pre-existing pressure on institutional commissions. Finally, execution income is affected by the impact of market moves on the value of shares held as a market maker and shares received in lieu of fees. Since this figure was first disclosed in 2015, annual revenue has averaged £5.1m.

Exhibit 3: Revenue analysis 2016–18

2016

2017

2018

% over three years

Corporate finance

29,720

44,030

32,734

72

Nomad and broking

5,481

5,273

5,070

11

Research

5,033

2,949

2,754

7

Execution

3,509

7,252

4,395

10

Total revenue

43,743

59,504

44,953

100

Source: Cenkos, Edison Investment Research

The group has straightforward strategic objectives, reflecting its role and the existing and prospective client base.

Grow revenues by retaining existing clients and winning new ones; to this end, Cenkos fosters a client-first culture to ensure good client outcomes.

Maintain a strong team culture to retain and recruit talented staff.

Disciplined approach to operational efficiency. An example of this is the use of enhanced regulatory monitoring technology that is set to support operational leverage as activity rises.

The strong balance sheet may be used to invest in the business where appropriate to support growth.

Use cash flow and earnings to underpin shareholder returns.

Historically, Cenkos has focused on the organic development of its business, probably reflecting the multiple risks inherent in combining people-based companies. Nevertheless, in 2018 it acquired the nomad and corporate broker business of Smith & Williamson. The relatively small size of this transaction and ability to transfer clients and key staff were attractive features. Cenkos agreed to pay Smith & Williamson a deferred consideration equivalent to 20% of all fees earned in the 12 months from completion (December 2018) from clients transferred. A team of six joined the corporate finance department and 12 nomad clients transferred to Cenkos.

Management and staff

Details of group board members are given on page 13. The group board currently comprises three non-executive directors and Jim Durkin. Julian Morse (head of growth companies) is set to join the board as an executive director once FCA approval has been received. The majority of the executive team joined the company at or around the time of its formation and have substantial experience in the securities industry, providing the business with continuity and a range of well-established business relationships.

In addition, across the whole of Cenkos, 51% of staff have been with the firm for more than five years. Naturally, there is a level of staff change for normal reasons and, as an example, in its August trading update the company noted that a number of individuals from the investment companies team would be leaving, although the head of the team remains in place and Cenkos remains committed to this area of the business.

In 2018 the segmental split of the 110 average employees was: corporate finance 22, corporate broking 47 and support services 41.

H119 results review

In this section we provide a brief summary and commentary on Cenkos’s first-half figures, announced in September. Exhibit 4 shows the half yearly progression of the profit and loss account from 2017.

Exhibit 4: Half yearly P&L summary

£000s unless shown

H117

H217

H118

H218

H119

Change y-o-y

Sequential change

Corporate finance

21,209

22,821

11,925

20,809

6,245

(48%)

(70%)

Nomad and broking

2,610

2,663

2,552

2,518

2,521

(1%)

0%

Research

1,741

1,208

1,538

1,216

938

(39%)

(23%)

Execution

3,689

3,563

2,085

2,310

921

(56%)

(60%)

Total revenue

29,249

30,255

18,100

26,853

10,625

(41%)

(60%)

Administration expenses

(25,032)

(24,496)

(17,674)

(24,228)

(10,876)

(38%)

(55%)

Operating profit/loss

4,217

5,759

426

2,625

(251)

N/A

N/A

Investment income

8

15

38

65

65

71%

0%

Finance cost

0

0

0

0

(10)

N/A

N/A

Pre-tax profit

4,225

5,774

464

2,690

(196)

N/A

N/A

Tax

(904)

(911)

(123)

(682)

(5)

N/A

N/A

Attributable profit

3,321

4,863

341

2,008

(201)

N/A

N/A

EPS (p)

6.1

0.0

0.6

0.0

(0.6)

N/A

N/A

DPS (p)

4.5

4.5

2.0

2.5

2.0

0%

N/A

Source: Cenkos, Edison Investment Research

We would highlight the following points:

In the period shown, total revenue has varied substantially, between c £30m and below £11m, with corporate finance revenue accounting for much of this variation, as would be expected. For H119, overall revenue fell by 41% y-o-y, with corporate finance down by 48% reflecting the particularly subdued level of corporate activity, with funds raised on behalf of clients also 48% lower at £343m versus £666m. There were also sharp reductions in research and execution revenues as MiFID II effects and market levels continued to affect these areas. The recurring fees earned by the nomad and broking segment allowed it to maintain its record of relative stability.

Administration expenses were reduced by 38%, almost matching the percentage revenue decline, with almost all of the £6.8m reduction being in staff costs (which halved to £6.5m), reflecting flexibility in variable compensation, some reductions in headcount across the business and the absence of some one-off costs relating to the period during which FCA approval of the CEO appointment was pending.

This left a marginal loss at the operating and pre-tax profit levels, but the group notes that, prospectively, there should be an annualised saving of £2.0m in staff costs as one-off staff costs fall away and the reduction in headcount takes full effect.

There was an unchanged dividend of 2p. Cenkos reiterated its dividend policy, which is to use earnings and cash flow to underpin shareholder returns using a combination of dividends and share buybacks. The company seeks to pay stable dividends and, after allowing for investment in the firm, satisfying capital requirements and taking into account market conditions and outlook, to return excess cash to shareholders.

Market background and outlook

We start by summarising the trends in primary activity and secondary trading on the London Stock Exchange Main and AIM markets.

The two charts below show the value of new and further issuance for the London Stock Exchange markets since 2007, highlighting how issuance peaked following and prior to the financial crisis for the Main and AIM markets respectively. The high levels of issuance on the Main Market in 2008–09 were boosted by capital raising required by banks to strengthen their balance sheets. Subsequent issuance has been low in the context of those years but has fluctuated, declining in 2018 and being mixed in 2019 year to date. For the nine months to end September this year, the total value of Main Market issuance was 3% ahead of the prior year period, but this was much more concentrated in fewer names and the number of new issues fell by 31%. On AIM, the picture has been significantly weaker with the value of total issuance down by 31% and the number of new issues 59% lower.

Exhibit 5: LSE Main Market money raised

Exhibit 6: LSE AIM money raised & no. of new issues

Source: London Stock Exchange. Note: 2019 to end September

Source: London Stock Exchange. Note: 2019 to end September

Exhibit 5: LSE Main Market money raised

Source: London Stock Exchange. Note: 2019 to end September

Exhibit 6: LSE AIM money raised & no. of new issues

Source: London Stock Exchange. Note: 2019 to end September

Exhibit 7 illustrates recent equity market performance highlighting the relative weakness of the FTSE All-Share AIM index (-6% over 12 months), which is likely to have fed into the weakness in issuance shown above. In comparison, the FTSE All-Share and Small Cap indices were up by 9% and 4% over 12 months (all total return indices). The second chart shows a more subdued level of recent trading on the London Stock Exchange order book; in the nine months to end September, the average daily value traded was 19% below the prior year.

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Exhibit 8: LSE order book, average daily value traded

Source: Refinitiv. Note: Total return indices.

Source: London Stock Exchange (Main Market)

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Source: Refinitiv. Note: Total return indices.

Exhibit 8: LSE order book, average daily value traded

Source: London Stock Exchange (Main Market)

The London Stock Exchange data therefore confirm the dampening impact of sustained political uncertainty on both issuance-related and trading activities.

We now turn to the level of M&A activity in the UK and the next two charts use ONS data to illustrate recent trends. Exhibit 9 shows the volatility of the value of transactions over time, primarily reflecting the incidence of large transactions although, even with these fluctuations, it is clear there has been a decline in the value of M&A transactions over the last year. This is also evident in the shorter time period included in Exhibit 10; the number of transactions in H119 was 15% lower than the prior year period and the value of transactions was 37% lower.

Exhibit 9 UK M&A value 2015–19

Exhibit 10: UK M&A value and volume 2018 and H119

Source: ONS, Edison Investment Research

Source: ONS, Edison Investment Research

Exhibit 9 UK M&A value 2015–19

Source: ONS, Edison Investment Research

Exhibit 10: UK M&A value and volume 2018 and H119

Source: ONS, Edison Investment Research

The weakness in new issuance in particular and also M&A mirrors the experience of Cenkos and other quoted stockbrokers, with political uncertainty and a consequent reduction in investor appetite constricting the opportunities for equity fund-raising. Nevertheless, the pipeline of potential corporate transactions remains promising according to Cenkos’s outlook comments with the H119 results and this is in line with statements made by finnCap and Arden regarding this part of their business. A possible resolution of political uncertainty following the forthcoming general election could be a catalyst for a bounce back in corporate and investor activity, although continued difficulties surrounding Brexit may yet prolong the period of subdued activity.

To put these comments in context, Exhibit 11 lists selected completed transactions in which Cenkos has been involved in 2018 and 2019 to September. This illustrates the range of client companies served and transaction sizes carried out. The number of selected transactions reported for 2019 to end September was lower and, as noted earlier, the total raised for clients in H119 was 48% lower at £343m versus £666m. Cenkos has acted as advisor for two of the seven AIM IPOs that took place to end September in an indication that it is maintaining its position even in lacklustre market conditions. As we will illustrate in the financial section below, a potential pick-up in the number and/ or size of transactions in subsequent months could have a material impact on profitability.

Exhibit 11: Selected completed acquisitions (consideration in £m unless shown)

2018

Company

Transaction

Consideration

2019

Company

Transaction

Consideration

January

Bango

Placing

5.0

February

Kromek

Placing

21.0

Seeing Machines

Placing

A$53.0

March

Diaceutics

IPO

17.0

February

Fulcrum Utility Services

Placing

10.4

April

Seeing Machines

Placing

27.5

March

Safeharbour

IPO

22.7

Tasty

Placing

3.3

Jaywing

Placing

1.3

May

Landlore Resources

Placing

1.0

Chariot Oil & Gas

Placing

12.5

Falcon Oil & Gas

Placing

US$9.0

ICG Longbow

Placing

4.3

June

GCP Asset Backed Inc.

Placing

63.3

Landlore Resources

Placing

3.2

Collagen Solutions

Placing

6.0

April

Breedon

Placing

170.0

Marlowe

Placing & acqn

20.0

Corero Network Security

Placing

4.0

July

Dods

Placing

13.2

May

Restore

Placing

51.5

August

Brickability

IPO

56.7

88 Energy

Placing

A$17.0

Intelligent Ultrasound

Placing

6.3

June

Rosenblatt

IPO

43.0

Rotala

Placing

1.1

RA International

IPO

18.8

September

Inspiration Healthcare

Placing

4.3

Eddie Stobart Logistics

Placing

30.0

Equals

Placing

14.3

Trinity Exploration & Production

Placing

US$20.0

Marlowe

Placing

20.0

August

Creo Medical

Placing

51.0

Duke Royalty

Placing

44.0

Venture Life

Placing

18.8

September

Arena Events

Placing

20.0

IG Design

Placing

50.0

GCP Asset Backed Inc. Fund

C sh.issue

51.1

Aberdeen Div. Inc. & Growth

Placing

1.6

October

Shearwater

Placing

16.7

November

Angling Direct

Placing

20.0

88 Energy

Placing

A$10.0

December

GCP Asset Backed Inc. Fund

Placing

13.0

Mercantile Ports & Logistics

Placing

29.8

Medaphor

Placing

5.1

Filta

Placing

3.0

Esure (adviser to Bain Capital)

Acquisition

1,200.0

Marlowe

Placing

7.0

Total

1,989.0

Total

262.1

Source: Cenkos

Financials

We have already highlighted the substantial historical variation in Cenkos’s corporate finance revenues that is also a characteristic of the industry. This means that forecasts should be viewed in light of the lumpiness and cyclicality that lie behind these fluctuations.

For the current year, we have assumed total revenue of £32.5m, down 28% compared 2018 but still implying a significant second-half improvement compared with H119. This reflects Cenkos’s positive comments on the start of H219, but is contingent on completion of a number of deals prior to the year end so remains subject to considerable uncertainty.

For 2020, any estimate has to be even less certain, a situation exacerbated by the political background. We have used an assumption of total revenues of £37.5m including an improvement of 22% in corporate finance revenue although, as shown in Exhibit 12, both this and total revenue would still be significantly below the level seen in 2018.

Exhibit 12: Revenue estimates

December year end (£000s)

2018

2019e

2020e

Corporate finance

32,734

23,460

28,560

Nomad and broking

5,070

5,040

5,040

Research

2,754

1,880

1,900

Execution

4,395

2,120

2,000

Total revenue

44,953

32,500

37,500

Source: Edison Investment Research

Given the uncertainty of potential revenues and the importance of Cenkos’s flexible cost base, we have prepared a scenario analysis around our central assumptions for 2020 (Exhibit 13). This assumes non-staff costs are held constant between the scenarios at c £9.6m, although in practice there could be some change here. We have assumed that variable staff costs account for approximately 65% of total staff costs. For code staff1 this ratio was 87% in 2017 and 2018, but we assume the variable element will be significantly lower across the company as a whole given that fixed remuneration is at a relatively low level for senior staff included in this category (at an average of c £100,000 compared with Numis c £180,000 in FY18 and Shore Capital c £166,000 in FY17). Flexing of assumed variable staff costs in these scenarios means that the staff cost to revenue ratio shows limited movement, while the impact on profits of a £2.5m variance in revenue is limited to £1m at the pre-tax level.

  Those deemed to have a material impact on the firm’s risk profile

Exhibit 13: P&L scenario analysis for 2020e

£000 unless stated

Low

Central

High

Revenues

35,000

37,500

40,000

Non staff costs

(9,550)

(9,550)

(9,550)

Staff costs

(23,060)

(24,560)

(26,060)

Operating profit

2,390

3,390

4,390

Investment income

130

130

130

Finance income

(20)

(20)

(20)

Pre-tax profit

2,500

3,500

4,500

Tax

(475)

(665)

(855)

Net profit

2,025

2,835

3,645

C/I ratio

93.2%

91.0%

89.0%

Staff costs/revenue

65.9%

65.5%

65.2%

EPS (p)

3.5

5.0

6.5

Source: Edison Investment Research

Turning to the balance sheet, Cenkos had cash and cash equivalents at the end of H119 of £14.7m. This was £7m lower than the H118 level with the outflow resulting primarily from a £3m operating cash outflow (including a £5.9m working capital outflow) and a total cost of £3.7m for dividends and share repurchases. The regulatory capital position remains strong with an end-H119 capital resources surplus of £15.9m above the Pillar 1 requirement.

As noted earlier, Cenkos’s policy is to pay stable dividends and, after satisfying capital requirements and taking account of investment requirements and the market background, to return excess cash to shareholders. This policy appears well-suited to the nature of the business where profits can vary significantly, and provides shareholders with the potential for a degree of consistency in dividend payments while also having surplus cash returned in periods of stronger profitability. Reflecting the policy, from flotation to end H119, Cenkos paid out dividends of £87.6m and spent £25.4m repurchasing shares.


Sensitivities

We would highlight the following as important sensitivities for Cenkos’s business.

As highlighted in the discussion of the company’s longer-term revenue and profit record and the scenarios shown in the Financials section, Cenkos’s results are dependent on market conditions. Arguably, from current levels there is greater upside risk in terms of market activity, but this does not exclude a further worsening before the trading background improves. Although Cenkos reported a small loss at the interim stage it has traded profitably since flotation and, on our estimates, would return to profitability with its full year results for 2019.

The risk of losing key staff is a consideration for Cenkos, as for its peers, and while it has a remuneration structure that rewards successful teams well when trading is good, there is still a risk when a competitor decides to make a strategic investment in staff to secure market position (Panmure Gordon being a recent example of a firm which has been clear that it was following this approach).

Reputational risk is important for all stockbroking businesses and Cenkos seeks to mitigate this through encouraging the right culture and the operation of a multi-disciplinary new business committee. Since incurring a £0.53m fine from the FCA in 2016 in relation to an abortive attempt to transfer a client (Quindell) from AIM to a Premium Listing, Cenkos implemented a remedial plan in 2017/18 to address the shortcomings identified in its oversight processes. It remains sensitive to the need to ensure that its approach and systems mitigate such risks.

Regulatory change is a continuing feature for capital markets businesses, which entails additional costs associated with adapting IT systems and, in some cases, employing additional staff. The most significant recent change, the implementation of MiFID II, took place at the beginning of 2018 so the major part of the financial impact has probably been seen, but most commentary suggests that downward pressure on institutional payments for research/sales remains under pressure given the trend for a contraction in asset managers’ own fees.

Valuation

We start by showing a comparative valuation table that includes quoted UK stockbrokers and, as an additional reference, a selection of US and European investment banks and advisers (Exhibit 15). While the UK quoted peers address the same market as Cenkos, the businesses are differentiated and there is a lack of available estimates to support a broad comparison. Nevertheless, the last reported P/E multiples are within a relatively narrow range and, where available, the prospective (current year multiples) are markedly higher with earnings depressed by reduced market activity. Cenkos trades within the range on its price to book ratio, but offers a premium yield of 7.8% (here we have used 4p, our assumed 2019 payment as the dividend rather than the 4.5p paid for FY18).

The investment banks and advisers are much larger businesses in most cases and exposed to different markets. On consensus estimates, they are, in most cases, not expected to see the degree of earnings reduction expected for UK stockbrokers. The average last-reported P/E is not somewhat lower than the UK stockbroker average while, given more resilient earnings, most prospective multiples are markedly lower. ROEs and with them price to book ratios for this group are generally higher than for the UK brokers.

Exhibit 14: Peer comparison

Price
(local)

Market cap
(£m)

Last reported
P/E (x)

Current year P/E (x)

Yield
(%)

ROE
(%)

Price to book
(x)

UK brokers

Cenkos

50

26

11.9

48.2

7.9

8.0

1.0

Arden Partners

18

5

Loss

N/A

5.6

N/A

0.7

FinnCap

24

41

13.0

28.4

5.8

11.1

1.9

Numis

232

243

10.0

25.2

5.2

8.1

1.8

Shore Capital

223

48

17.8

N/A

4.5

4.8

0.8

WH Ireland

49

21

Loss

N/A

0.0

N/A

1.4

UK average

13.6

N/A

4.2

8.0

1.3

US, European IB and advisory

Bank of America

32.8

295,219

12.5

12.1

1.6

10.5

1.2

Evercore

77.9

3,546

8.6

9.9

2.4

69.7

4.1

Goldman Sachs

218.6

77,418

8.7

10.0

1.4

12.3

1.1

Greenhill

17.5

356

12.3

N/A

1.1

29.7

5.7

JP Morgan

129.1

404,920

14.3

12.3

1.9

13.0

1.6

Moelis

35.9

2,147

12.0

15.2

5.2

60.4

5.0

Morgan Stanley

48.8

80,572

10.3

9.8

2.3

11.8

1.2

Stifel Financial

60.4

4,200

11.4

10.5

0.8

14.2

1.4

Credit Suisse

13.0

33,374

12.0

10.7

2.0

7.8

0.8

Deutsche Bank

6.9

14,401

15.9

Loss

1.6

N/A

0.2

UBS

12.4

47,718

9.6

10.4

5.7

9.5

0.9

US, European IB and advisory average

11.6

11.2

2.4

23.9

2.1

Source: Refinitiv, Edison Investment Research. Note: Priced at 6 November 2019. P/Es are for financial years therefore not all the same period end.

Exhibit 15 shows the 10-year history for Cenkos’s price to book value, which is a useful measure to monitor for brokers when earnings are depressed or negative. As can be seen, Cenkos’s current rating at 1x book represents a low point over this period reflecting the difficult market background, but also suggesting an opportunity on a medium to longer view given the potential for a substantial recovery in earnings and return on equity.

Exhibit 15: Ten-year history of the price to book value ratio for Cenkos

Source: Refinitiv, Edison Investment Research

Using an ROE/COE valuation model, we can calculate the ROE assumed by the market as being 10%, based on a cost of equity of 10%, growth of 4% and the H119 book value of 50.9p. This compares with our estimate of 3% for the current year, 10% for 2020 and the historical averages over five and 10 years of 28% and 26%, respectively.

Finally, to provide further context, we include a table of recent share price performance for the peers shown above. For most of the UK stocks there are significant negative movements over one year, year to date and from 12-month highs, which is unsurprising given the prolongation of political uncertainty and the resulting market background. In line with the more stable earnings expectations noted above for the investment bank and adviser group, share prices on average have been more stable, although in some instances reduced expectations have also driven marked share price weakness. As with the price to book history, Cenkos’s share price performance may suggest an opportunity for those prepared to look ahead to a period of more favourable market conditions that would allow the company to demonstrate its ability to execute transactions for clients and generate attractive returns on equity and cash returns to shareholders.

Exhibit 16: Recent share price performance for peer group

One month

Three months

One year

Ytd

From 12-month high

UK brokers

Cenkos

11.7

12.9

-29.1

-27.1

-34.4

Arden Partners

-2.7

9.1

-41.0

-36.8

-41.9

FinnCap

-5.9

-7.7

N/A

-15.0

-19.7

Numis

9.2

-1.9

-21.7

-3.3

-25.3

Shore Capital

61.8

8.0

-12.7

3.5

-14.4

WH Ireland

-2.0

-1.0

-36.8

-27.4

-39.5

UK average

12.1

1.3

-28.0

-15.8

-28.2

US, European IB and advisory

Bank of America

15.7

16.9

17.0

33.2

-0.8

Evercore

2.9

-0.1

-5.5

8.9

-21.2

Goldman Sachs

8.9

8.4

-4.4

30.9

-6.6

Greenhill

33.9

21.4

-17.7

-28.4

-43.8

JP Morgan

12.6

17.8

18.3

32.2

-0.9

Moelis

16.6

8.1

-10.4

7.4

-24.1

Morgan Stanley

19.5

20.4

6.4

23.0

-2.3

Stifel Financial

16.6

12.3

27.4

45.7

-2.6

Credit Suisse

13.9

15.7

0.9

20.3

-8.1

Deutsche Bank

7.0

0.7

-24.4

-0.5

-26.0

UBS

15.7

14.1

-13.7

0.3

-16.1

US, European IB and advisory average

14.9

12.3

-0.6

15.7

-13.9

Source: Refinitiv

Exhibit 17: Financial summary

£000s

2015

2016

2017

2018

2019e

2020e

Year end 31 December

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

76,513

43,743

59,504

44,953

32,500

37,500

Administration expenses (excluding depreciation)

(56,510)

(38,581)

(49,286)

(41,655)

(30,962)

(33,820)

EBITDA

20,003

5,162

10,218

3,298

1,538

3,680

Depreciation

(241)

(182)

(242)

(247)

(648)

(290)

Operating profit

19,762

4,980

9,976

3,051

890

3,390

Non-recurring items

0

0

0

0

0

0

Investment revenues

134

83

23

103

110

110

Profit before tax

19,896

5,063

9,999

3,154

1,000

3,500

Tax

(4,525)

(1,858)

(1,815)

(805)

(232)

(665)

Profit after tax, continuing operations

15,371

3,205

8,184

2,349

768

2,835

Discontinued operations

0

(661)

(973)

0

0

0

Profit after tax

15,371

2,544

7,211

2,349

768

2,835

Average number of shares outstanding (m)

56.5

54.7

54.7

51.8

51.0

51.0

EPS continuing operations (p)

27.2

5.9

15.0

4.2

1.0

5.0

Fully diluted EPS (p)

26.8

4.6

13.2

4.2

1.0

5.0

Dividend per share (p)

14.00

6.00

9.00

4.50

4.00

4.50

NAV per share (p)

0.53

0.50

0.56

0.54

0.52

0.57

ROE (%)

43%

10%

25%

8%

3%

10%

Cost/income ratio

74.2%

88.6%

83.2%

93.2%

97.3%

91.0%

Staff costs/Revenue

60.1%

68.3%

63.7%

64.4%

70.1%

65.5%

BALANCE SHEET

 

 

 

 

 

 

Non-current assets

1,626

625

1,263

1,178

6,538

5,868

Property, plant and equipment

296

389

525

558

591

601

Other non-current assets

1,330

236

738

620

5,947

5,267

Current assets

64,725

62,692

68,492

65,334

54,793

57,178

Other current assets inc Investments - long positions

12,706

13,811

10,615

12,648

10,168

10,168

Cash

33,106

23,795

36,829

33,635

26,091

28,476

Debtors and other

18,913

25,086

21,048

19,051

18,534

18,534

Current liabilities

(37,432)

(35,254)

(39,641)

(38,658)

(34,507)

(33,827)

Other current liabilities inc short positions

(2,551)

(2,694)

(3,341)

(6,018)

(9,007)

(8,327)

Other current liabilities

(34,881)

(32,560)

(36,300)

(32,640)

(25,500)

(25,500)

Non-current liabilities

(351)

(880)

(366)

(263)

(171)

(171)

Net assets

28,568

27,183

29,748

27,591

26,653

29,048

CASH FLOW

 

 

 

 

 

 

Operating cash flow

15,538

(465)

6,917

3,180

3,000

5,960

Working capital and other items

16,184

(1,387)

13,490

1,444

(6,134)

0

Tax paid

(5,049)

(2,533)

(1,334)

(1,664)

(427)

(665)

Net cash from operating items

26,673

(4,385)

19,073

2,960

(3,561)

5,295

Fixed asset investment

(174)

(272)

(378)

(280)

(307)

(300)

Acquisitions/disposals

0

0

0

(100)

0

0

Other investing activities

191

93

23

90

104

110

Share (purchase)/issuance

(16,823)

(438)

(549)

(2,353)

(678)

0

Ordinary dividends

(9,740)

(4,367)

(5,201)

(3,573)

(2,418)

(2,040)

Other financing

47

58

66

62

(684)

(680)

Other

0

0

0

0

0

0

Net cash flow

174

(9,311)

13,034

(3,194)

(7,544)

2,385

Opening net (debt)/cash

32,932

33,106

23,795

36,829

33,635

26,091

FX

0

0

0

0

0

0

Closing net (debt)/cash

33,106

23,795

36,829

33,635

26,091

28,476

Source: Cenkos Securities accounts, Edison Investment Research

Contact details

Revenue by geography

6 7 8 Tokenhouse Yard
London
EC2R 7AS
United Kingdom
+44 (0)20 7397 8900
www.cenkos.com

Contact details

6 7 8 Tokenhouse Yard
London
EC2R 7AS
United Kingdom
+44 (0)20 7397 8900
www.cenkos.com

Revenue by geography

Board members

Acting non-executive chairman: Jeff Hewitt

Chief executive: Jim Durkin

Jeff Hewitt was appointed to the board in 2008 and as acting non-executive chairman in November 2018. A qualified chartered accountant, he has held various executive positions including finance director and deputy chairman at Electrocomponents. Hewitt is also a non-executive director of Foreign & Colonial Investment Trust and has previously been a non-executive director or chairman of a number of listed and private companies.

Jim Durkin was re-appointed as an executive director and CEO in August 2019 having resigned from these positions in July 2017. He is one of the founder shareholders of Cenkos, joining the company as head of the corporate broking team in 2005. Durkin was appointed as an executive director in 2006 and CEO in 2011. During his 30-year career in the securities industry, he has had substantial experience originating and executing corporate finance transactions across a range of industries including insurance, property, financials and utilities.

Non-executive director: Andrew Boorman

Non-executive director: Jeremy Miller

Andrew Boorman was appointed as a non-executive director in November 2017. From 2013 he acted as a consultant advisor to the boards of a number of financial services businesses with an emphasis on strategic human resource issues including governance, risk management and remuneration. Previously he held a number of senior roles at Henderson Group over 10 years including MD corporate services and group HR director.

Jeremy Miller was appointed to the board as a non-executive director in July 2019. With 30 years’ experience in investment banking he has held senior roles at Centerview Partners, Simon Robertson Associates, Dresdner Kleinwort Wasserstein and James Capel. A qualified chartered accountant, he has been seconded to The Takeover Panel. Previously a non-executive director at Countryside Properties, he is chairman of The National Merchant Buying Society, one of the UK’s largest co-operative societies.

Executive director designate: Julian Morse

It was announced in October 2019 that Julian Morse is to be appointed as an executive director, subject to FCA approval. He has been head of the Growth Companies team since 2016 and is one of the founding members of the team, having joined in 2006. Previously a director at Beeson Gregory and Evolution Securities, Morse has over 25 years’ experience in the City, where he has advised and raised equity in IPOs and secondary issues for a wide range of companies across many sectors.

Principal shareholders (19 August 2019)

(%)

Cannacord Genuity

9.47

Paul Hodges

9.32

James Durkin

8.79

JPMorgan Asset Management Limited

7.49

Crystal Amber Fund Limited

7.14

Nicholas Wells

3.88

Companies named in this report

Numis, NUM; Shore Capital, SGR


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This report has been commissioned by Cenkos Securities and prepared and issued by Edison, in consideration of a fee payable by Cenkos Securities. Edison Investment Research standard fees are £49,500 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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Cenkos Securities and prepared and issued by Edison, in consideration of a fee payable by Cenkos Securities. Edison Investment Research standard fees are £49,500 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.

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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