Numis Corporation — Strong H1 and franchise remains robust

The results for H118 (to end March) were characterised by a very strong performance from the corporate broking and advisory activities compared with H117. Equity revenues were virtually unchanged in a period that included the initial implementation of MiFID II. There was evidence of continued strengthening of the Numis franchise in an increase in the corporate client count and a rise in the average fee per corporate transaction. The H118 P&L figures are set out in Exhibit 1 which puts them in the context of the first and second half of last year together with the annual results between FY13 and FY17. Selected points from the results are highlighted below with comparisons against H117 unless stated.

The company has, as noted , increased headcount over the period, making selected hires of senior staff to enhance capabilities in certain areas of the business (particularly in equities) and at a mid-tier level (corporate broking and advisory). Among those reported as joining are: Ulick Burke, who joins as a director in the equities team having been head of UK institutional sales at Bank of America Merrill Lynch; Richard Paige, an industrials analyst and previously head of Barclays’ UK mid-cap research; and Tintin Stormont, a technology analyst who was a partner at N+1 Singer. The progression of average headcount revenues per head and the number of corporate clients is shown in Exhibit 2 with the split by activity at the end of FY17 given in Exhibit 3.

Numis reported a strong cash position, even after share buybacks, at £82.5m compared with £71.2m at the end of H117 (seasonally lower than the end FY17 level of £95.9m). Since the period end the cash position has been further strengthened because the company has decided to close the Numis Mid Cap Fund and the £12.5m proceeds from its liquidation were received in April. The decision reflected a judgement that the performance had not been sufficiently strong (over three years broadly in line with its benchmark) to justify marketing the fund to third party investors.

At the half-year end, the remainder of the strategic investments were mainly unquoted and these holdings were valued at £13.9m, with limited overall movement since the end of FY17 (£13.5m) including a net movement on acquisitions and disposals of £0.3m and a value uplift of £0.7m. The aim remains to recycle some of the older portfolio investments (for instance the long-term holding in Randall & Quilter has been sold) and to focus on early stage investments, which can benefit from access to Numis business network. The expectation is that the number of strategic investments will not change significantly over the medium term.

Recent equity market trends are shown in Exhibits 4 and 5. Evident here is the medium-term strength in each of the indices shown, the small cap sector outperformance over this period and the dip and recovery seen in markets in calendar year 2018 to date. The volatility index highlights the period of declining volatility that was interrupted early in 2018 with a market correction. As noted market levels have recovered close to those that prevailed at the beginning of the year and volatility has subsided.

If sustained this would seem likely to create a generally favourable background both for the equities and corporate banking and advisory businesses. Numis has indicated that since the end of H118, the equities business has performed in line with the first half: an encouraging indicator following uncertainty last year over the potential impact of MiFID II implementation.

On the corporate broking and advisory business Numis reports that it has a strong IPO pipeline, reflecting marketing efforts in the first half although, as usual, delivery here will depend on market levels and volatility both remaining at levels that encourage corporate and investor confidence.

Developing and marketing the advisory capability within the division is seen as an important part of the company’s strategy. Here the continued growth in the corporate client base over recent years has been important as it has resulted in an increase in the number, size and diversity of companies already advised by Numis that may be considering transactions. The company reports that although UK activity levels have been comparatively muted (see value and volumes by calendar year in Exhibits 6 and 7) its corporate clients (particularly in the mid-cap area) are putting greater emphasis on M&A activity and have the liquidity and debt capacity to support this.

We summarise changes in our estimates in Exhibit 8. Our revenue estimates are increased by 9% and 8% for FY18 and FY19 respectively following the strong first half performance but, again, reflecting the pattern in the first half, we have allowed for increased staff and other costs as Numis invests to support future growth. This leaves our operating profit forecasts up by 4% and 2%. The decision to close the Numis Mid Cap Fund means the overall size of the strategic investment portfolio is smaller and the returns we assumed would be generated by the fund will be removed. It is difficult to forecast the incidence of gains from the remaining, mainly unquoted, portfolio but we have reduced our estimates for other income from £2m per annum to £0.5m for FY18 and FY19. This results in modestly lower profit and EPS forecasts, as shown.

Cash flow in the first half is seasonally weaker reflecting the incidence of costs (notably bonus payments) and is in any case subject to working capital fluctuations. For H118 net cash flow from operations was positive at £4.3m but was outweighed by share buybacks, dividend payments and other items resulting in a £13.1m outflow in the half compared with £17.6m for H117. As noted earlier, this left cash at £82.5m prior to the receipt of the £12.5m proceeds from liquidating the Numis Mid Cap fund.

The H118 regulatory capital position was still in significant surplus with shareholder funds of £140m (c £134m post interim dividend) covering the regulatory requirement by c 2x, providing the company with considerable resilience and flexibility.

We have updated our comparative valuation table below. It includes UK brokers together with a selection of US and European investment banks and advisory firms. The absence of published estimates for the other UK brokers explains the lack of current year P/Es for the comparison. While the businesses have different profiles they do offer a qualified peer group for comparison. In terms of P/Es (calculated on last reported earnings), Numis is below the average across the whole list (25x), while its above average price to book ratio is supported by the above-average return on equity.

We have used a ROE/COE valuation model to infer the ROE assumption required to match the 435p share price at time of writing: this gives a value of 24% (based on the H118 NAV of 131p and assuming a cost of equity of 10% and growth of 4%). Our current forecasts indicate ROEs of 22% and 21% for FY18 and FY19 but on a medium-term view a combination of deployment or return of some part of the excess capital highlighted earlier and/or better than expected results could put returns of 24% or more well within reach. The sensitivity of the valuation to changing growth and ROE assumptions is illustrated in Exhibit 10.