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Research: Financials
As would be expected, Numis’s first-half trading has been affected by the uncertain UK political background, but it has seen a pick-up in corporate transactions in March and the pipeline of potential deals has also increased. This should provide an encouraging starting point once greater certainty and business confidence return. On this basis, we still look for a stronger second half but have reduced our estimates to reflect conditions in the first half.
Written by
Numis Corporation |
Tough H1 background but strong market share gains |
H119 trading update |
Financial services |
2 April 2019 |
Share price performance
Business description
Next events
Analysts
Numis Corporation is a research client of Edison Investment Research Limited |
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As would be expected, Numis’s first-half trading has been affected by the uncertain UK political background, but it has seen a pick-up in corporate transactions in March and the pipeline of potential deals has also increased. This should provide an encouraging starting point once greater certainty and business confidence return. On this basis, we still look for a stronger second half but have reduced our estimates to reflect conditions in the first half.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
112.3 |
32.5 |
22.4 |
12.0 |
11.2 |
4.8 |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
9.6 |
4.8 |
09/18 |
136.0 |
31.6 |
23.0 |
12.0 |
10.9 |
4.8 |
09/19e |
119.7 |
22.3 |
15.8 |
12.0 |
15.8 |
4.8 |
Note: *PBT and EPS are diluted on a reported basis.
H119 trading update
The weak equity market in the last quarter of calendar 2018 and the political difficulties over Brexit in the first quarter of the current year cast a pall over capital market activity during H119. Numis reports that this has resulted in a 26% reduction in revenues compared with the strong H118 performance: this is equivalent to an 11% sequential reduction compared with H218. Positively, against a much reduced level of transactions in the market, Numis has gained market share and benefited from higher average deal fees. It has also seen a pick-up in transactions in March, including deals for Just Group and Randall & Quilter, and the merger of Primary Health Properties and MedicX, which provided a strong end to the period.
Adjusting our estimate
Divisionally, Numis signals that corporate broking and advisory revenues for the first half matched H218, slightly ahead of our estimate. As a result, we have maintained our full year estimate here on the basis that the recent improved momentum is broadly maintained. For equities, continued depressed activity and the marginally loss-making period for market-making reported at the time of the AGM in February warrants a reduction in estimate. At the group level, this results in a 4% reduction in estimated revenue and a 12% reduction at the earnings per share level. Clearly there is scope for substantial variation from this estimate in both directions subject to the development of corporate and market confidence.
Valuation: Still reasonable given longer-term returns
The uncertain near-term outlook and lack of immediately comparable prospective peer P/Es make standard earnings multiple comparisons difficult. However, using an ROE/COE model to infer the ROE which the current share price assumes indicates a figure of c 15%. While this is above our current year estimate (c 13%), it is well below the five-year historical average of c 20%, which appears conservative given the strength of the Numis franchise.
Estimate changes
The changes in headline numbers for our FY19 estimates, as discussed above, are set out in Exhibit 1.
Exhibit 1: Estimate revisions
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
|||||||||
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
|
09/19e |
124.9 |
119.7 |
-4.2% |
25.4 |
22.3 |
-12.2% |
18.0 |
15.8 |
-12.2% |
12.0 |
12.0 |
0.0% |
Source: Edison Investment Research
Beyond the revenue changes shown in Exhibit 2, we have assumed a small reduction in the percentage of variable remuneration of pre-bonus profit providing some mitigation of the operational leverage evident in the profit and EPS reduction. The increase in cost/income ratio is limited to a move from 79% to 81%. The group’s investment in staff to support its longer-term growth (see our January note) has a negative impact on near-term profits but should support longer-term growth, and the relative resilience of the Corporate Broking and Advisory division is an encouraging indicator of the strength of the franchise as it stands.
Exhibit 2: Revenue analysis
£000s |
2018 |
2019e |
Change |
Old 2019e |
New vs old |
Net trading gains |
9,594 |
3,500 |
-64% |
7,900 |
-56% |
Institutional commissions |
37,866 |
35,000 |
-8% |
35,800 |
-2% |
Equities |
47,460 |
38,500 |
-19% |
43,700 |
-12% |
Corporate retainers |
12,430 |
13,000 |
5% |
13,000 |
0% |
Advisory fees |
17,335 |
17,200 |
-1% |
17,200 |
0% |
Placing commissions/capital markets |
58,822 |
51,000 |
-13% |
51,000 |
0% |
Corporate broking and advisory |
88,587 |
81,200 |
-8% |
81,200 |
0% |
Total revenue |
136,047 |
119,700 |
-12% |
124,900 |
-4% |
Source: Edison Investment Research
Valuation
For reference, we have updated the comparative valuation table that we have included in previous notes (Exhibit 3). The absence of published estimates for UK peers and the particularly uncertain background limits the usefulness of P/E comparisons currently. Numis offers a higher yield than the averages for the UK or US/European comparators shown. It trades on a higher price to book ratio than the UK peers but also has a higher return on equity. On our revised estimates, the prospective return on equity would be c 13%, but the five-year historical average has been 20%. At a share price of 250p, an ROE/COE model suggests the market is discounting a return of c 15%: above our current year estimate but still conservative in the context of historical returns and the potential for significant improvement in a more favourable environment.
Exhibit 3: Peer comparison
Price |
Market cap |
Last reported |
Current P/E |
Yield |
ROE |
Price to book |
||
UK brokers |
||||||||
Numis |
250 |
266 |
10.9 |
16.8 |
4.8 |
19.3 |
1.9 |
|
Arden Partners |
26 |
8 |
Loss |
N/A |
0.0 |
N/A |
0.8 |
|
Cenkos |
69 |
38 |
16.3 |
N/A |
6.6 |
25.3 |
1.4 |
|
Shore Capital |
220 |
47 |
17.6 |
N/A |
4.5 |
4.8 |
0.8 |
|
WH Ireland |
39 |
17 |
Loss |
N/A |
0.0 |
N/A |
1.1 |
|
UK average |
14.9 |
N/A |
3.2 |
16.5 |
1.2 |
|||
US, European IB and advisory |
||||||||
Bank of America |
27.6 |
265,939 |
10.5 |
9.6 |
2.0 |
10.5 |
1.0 |
|
Evercore |
91.0 |
4,366 |
10.1 |
11.4 |
2.1 |
69.7 |
4.8 |
|
Goldman Sachs |
192.0 |
70,415 |
7.6 |
8.1 |
1.6 |
12.3 |
0.9 |
|
Greenhill |
21.5 |
445 |
N/A |
N/A |
0.9 |
29.7 |
7.0 |
|
JP Morgan |
101.2 |
331,451 |
11.2 |
10.4 |
2.4 |
13.0 |
1.3 |
|
Moelis |
41.6 |
2,332 |
13.9 |
13.9 |
4.5 |
60.4 |
5.8 |
|
Morgan Stanley |
42.2 |
72,111 |
8.9 |
8.7 |
2.6 |
11.8 |
1.0 |
|
Stifel Financial |
52.8 |
3,792 |
10.0 |
9.4 |
0.9 |
14.2 |
1.2 |
|
Credit Suisse |
11.6 |
30,532 |
10.7 |
8.5 |
2.3 |
NULL |
0.7 |
|
Deutsche Bank |
7.3 |
15,009 |
16.6 |
12.2 |
1.5 |
NULL |
0.2 |
|
UBS |
12.1 |
47,697 |
9.6 |
9.3 |
5.8 |
5.3 |
0.9 |
|
US, European IB and advisory average |
10.9 |
10.1 |
2.4 |
25.2 |
2.3 |
|||
Source: Refinitiv. Note: Priced at 1 April 2019, P/Es are for financial years therefore not all same period end.
Exhibit 4: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018 |
2019e |
||
Year end 30 September |
|||||||
PROFIT & LOSS |
|||||||
Revenue |
|
|
97,985 |
112,335 |
130,095 |
136,047 |
119,700 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(94,603) |
(86,248) |
||
Share based payment |
(4,104) |
(6,229) |
(10,454) |
(10,583) |
(10,600) |
||
EBITDA |
|
|
28,863 |
29,986 |
36,015 |
30,861 |
22,852 |
Depreciation |
|
|
(882) |
(1,126) |
(1,226) |
(1,113) |
(1,200) |
Amortisation |
(111) |
(125) |
(89) |
(49) |
(50) |
||
Operating Profit (before amort. and except). |
|
|
27,870 |
28,735 |
34,700 |
29,699 |
21,602 |
Net finance income |
190 |
37 |
188 |
212 |
210 |
||
Other operating income |
(1,978) |
3,759 |
3,431 |
1,733 |
500 |
||
Profit before tax |
|
|
26,082 |
32,531 |
38,319 |
31,644 |
22,312 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(4,967) |
(4,239) |
||
Profit after tax (FRS 3) |
|
|
21,549 |
26,399 |
30,377 |
26,677 |
18,073 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
115.8 |
114.1 |
||
EPS - basic (p) |
19.5 |
23.5 |
27.4 |
25.1 |
17.3 |
||
EPS - diluted (p) |
|
|
18.3 |
22.4 |
25.9 |
23.0 |
15.8 |
Dividend per share (p) |
11.50 |
12.00 |
12.00 |
12.00 |
12.00 |
||
NAV per share (p) |
102.0 |
113.5 |
125.0 |
135.0 |
136.4 |
||
ROE (%) |
19% |
22% |
23% |
19% |
12.7% |
||
EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
22.7% |
19.1% |
||
Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
21.8% |
18.0% |
||
BALANCE SHEET |
|||||||
Fixed assets |
|
|
6,724 |
5,522 |
6,147 |
8,215 |
7,565 |
Current assets |
|
|
279,114 |
312,462 |
407,850 |
533,033 |
531,673 |
Total assets |
|
|
285,838 |
317,984 |
413,997 |
541,248 |
539,238 |
Current liabilities |
|
|
(170,319) |
(188,895) |
(280,371) |
(398,112) |
(398,112) |
Long term liabilities |
0 |
(12) |
0 |
0 |
0 |
||
Net assets |
|
|
115,519 |
129,077 |
133,626 |
143,136 |
141,126 |
CASH FLOW |
|||||||
Operating cash flow |
|
|
6,467 |
48,735 |
43,369 |
45,830 |
24,533 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(1,014) |
(210) |
||
Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(29,035) |
(30,682) |
||
Net cash flow |
|
|
(14,675) |
29,239 |
6,812 |
15,781 |
(6,360) |
Opening net (cash)/debt |
|
|
(74,518) |
(59,591) |
(89,002) |
(95,852) |
(111,673) |
FX effect |
|
|
(252) |
172 |
38 |
40 |
0 |
Closing net (cash)/debt |
|
|
(59,591) |
(89,002) |
(95,852) |
(111,673) |
(105,313) |
Source: Company data, Edison Investment Research
|
|
The two acquisitions completed since the IPO in February 2018 contributed to a 7% year-on-year revenue growth during H119, even though the German machine vision market was flat. The recent acquisition of French competitor ELVITEC depressed gross margins, resulting in a 10% dip in adjusted EBITDA. However, management expects purchasing and other synergies to kick in during H219, improving margins and potentially delivering year-on-year profit growth.