Cenkos Securities — Uncertainty and opportunity

Cenkos Securities (AIM: CNKS)

Last close As at 24/02/2024

29.00

0.00 (0.00%)

Market capitalisation

GBP15m

More on this equity

Research: Financials

Cenkos Securities — Uncertainty and opportunity

Cenkos benefits from a flexible business model that rewards staff and shareholders in periods of strong activity and revenues but limits the downside when the level of transactions is depressed. Fixed costs have been further reduced, which will help sustain profitability prospectively, while the strong balance sheet and surplus regulatory capital are important supportive features for both clients and investors.

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Financials

Cenkos Securities

Uncertainty and opportunity

FY19 results

Financial services

14 May 2020

Price

45p

Market cap

£23m

Net cash (£m) at 1 April 2020

23.8

Shares in issue

51m

Free float

66%

Code

CNKS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.1)

(25.0)

(26.8)

Rel (local)

(1.4)

(4.1)

(11.3)

52-week high/low

65p

32p

Business description

Cenkos is a leading UK securities business that acts as nominated adviser, sponsor, broker and financial adviser to companies across all sectors and stages of growth. Since inception in 2005 it has raised more than £20bn in equity capital for corporate clients, which currently number about 100. The business has an approach where fixed costs are contained and variable rewards are closely geared to revenues.

Next events

AGM

June

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Cenkos Securities is a research client of Edison Investment Research Limited

Cenkos benefits from a flexible business model that rewards staff and shareholders in periods of strong activity and revenues but limits the downside when the level of transactions is depressed. Fixed costs have been further reduced, which will help sustain profitability prospectively, while the strong balance sheet and surplus regulatory capital are important supportive features for both clients and investors.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

43.7

5.06

4.6

6.0

9.8

13.3

12/17

59.5

10.00

13.2

9.0

3.4

20.0

12/18

45.0

3.24

4.4

4.5

10.2

10.0

12/19

25.9

0.15

(0.2)

3.0

N/A

6.7

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

FY19 results

As indicated at the time of the FY19 update in February, Cenkos recorded a much stronger second half in 2019 reflecting a number of significant fund raisings. H2 revenues of £15.3m compared with £10.6m in the first half, illustrating how substantially corporate activity can vary between accounting periods. For the full year, revenue was nevertheless 42% down y-o-y as Brexit uncertainty weighed on market and business sentiment. Following a first-half loss, there was a modest full year profit (£0.15m) compared with £3.2m in FY18 demonstrating cost base flexibility. Earnings per share were marginally negative and, taking into account the group’s strong balance sheet position, an uncertain outlook but with tempered optimism, a reduced final dividend of 1p (2.5p in FY18) was announced giving a total of 3p (4.5p in FY18) for the year.

Background and outlook

The pandemic has generated a rapidly changing market backdrop and considerable uncertainty; in these circumstances we have not included estimates in this report. While lower equity market levels and raised volatility are a deterrent to new issuance, the need for equity to support companies through exceptional circumstances has increased fund raising on both the Main and AIM markets of the London Stock Exchange in recent weeks. This is in tune with Cenkos’s commentary that it has a strong pipeline while it has also won retained clients in the current period, showing the benefit of its client focus and established team with a wide network of relationships.

Valuation: Trading close to book

Given high levels of uncertainty on the outlook and in the absence of estimates, we focus on the price to book ratio as an indicator of value. Trading at just below book value, the rating certainly appears cautious in the context of a five-year average historical return on equity of 17% and a 10-year average price to book of 2.3x.

FY19 results

Exhibit 1 provides a summary of the FY19 and H219 results with a number of features highlighted below. Comparisons are with FY18 unless stated.

Revenue was 42% lower with corporate finance, which accounted for 67% of the total, down 47%.

Corporate finance revenue bounced 78% in the second half compared with H119 and Cenkos carried out three of the 10 AIM IPOs that occurred in 2019.

The corporate client base was lower at 100 companies and investment funds versus 116, reflecting the rotation of a number of investment trusts and some de-listings. Within this list 78 are AIM clients (81) and 45% have been clients for over five years.

Within the nomad, broking and research segment, research fees and commission income fell 16% to £6.6m due to a difficult market background and the impact of MiFID II. Nomad and brokership retainer fees are the larger part of revenue within the segment, accounting for c £5m in 2018 and are more stable by nature.

Execution services revenue increased in the second half compared with the first but was still down 55% for the year, reflecting the market background and risk appetite (markets made in 237 stocks versus 285).

Administrative expenses were down 38%, primarily reflecting reduced variable compensation in line with lower revenues. A review of overheads has resulted in cost reductions that will lower fixed costs by £3m in 2020. See below for further detail on costs.

As a result of the flexibility in the cost base and higher H219 revenue, operating and pre-tax profits were achieved in the second half and for the full year.

Full-year EPS was marginally negative (following deduction of £0.138 of dividends in share incentive and deferred bonus plans) and the dividend for the full year was 3p versus 4.5p.

Playing into the dividend decision was balance sheet strength, which remains a feature with year-end cash of £18.3m, cash of £23.8m at 1 April and surplus pillar 1 capital of £13.5m at the year-end (£11.2m).

Exhibit 1: FY19 and H219 results summary

£000 unless stated

2018

H119

H219

2019

% change H219/H119

% change FY19/FY18

Corporate finance

32,734

6,245

11,119

17,364

78%

-47%

Nomad and broking

5,070

2,521

Research

2,754

938

Nomad, broking and research

7,824

3,459

3,123

6,582

-10%

-16%

Execution

4,395

921

1,049

1,970

14%

-55%

Total revenue

44,953

10,625

15,291

25,916

44%

-42%

Administration expenses

(41,814)

(10,876)

(14,925)

(25,801)

37%

-38%

Operating profit / (loss)

3,139

(251)

366

115

N/A

-96%

Investment income

103

65

41

106

-37%

3%

Finance expense

0

(10)

(66)

(76)

560%

N/A

Pre-tax profit

3,242

(196)

341

145

N/A

-96%

Tax

(805)

(5)

(96)

(101)

N/A

-87%

Attributable profit

2,437

(201)

245

44

-222%

-98%

Basic EPS (p)

4.4

(0.6)

0.4

(0.2)

N/A

-104%

DPS (p)

4.5

2.0

1.0

3.0

-50%

-33%

Source: Cenkos, Edison Investment Research

Exhibit 2 sets out selected corporate transactions for Cenkos during 2019 and 2020 to date. Last year Cenkos was involved in three of the 10 IPOs on AIM as new issues on the market reached a 25-year low. It has also executed one AIM IPO so far in 2020 (£80m IPO of FRP Advisory). The market conditions and the normal lumpiness in the incidence of transactions meant the level of funds raised for clients fell (from £1,193m to £664m) giving Cenkos a market share of 8% versus 13% in FY18. Cenkos notes that while COVID19-related uncertainty clouds the outlook, it nevertheless has a good pipeline and the requirement for otherwise strong businesses to bolster balance sheet liquidity is generating an alternative mix of actual and potential transactions.

Exhibit 2: Selected transactions 2019 and 2020

Month

Company

Transaction

Consideration

(£m unless shown)

2019

February

Kromek

Placing

21.0

March

Diaceutics

IPO

17.0

April

Seeing Machines

Placing

27.5

Tasty

Placing

3.3

May

Landlore Resources

Placing

1.0

Falcon Oil & Gas

Placing

USD9.0

June

GCP Asset Backed Income Fund

Placing

63.3

Collagen Solutions

Placing

6.0

Marlowe

Placing and acquisition

20.0

July

Dods

Placing

13.2

August

Brickability

IPO

56.7

Intelligent Ultrasound

Placing

6.3

Rotala

Placing

1.1

September

Inspiration Healthcare

Placing

4.3

Equals

Placing

14.3

October

Duke Royalty

Placing

17.5

December

MJ Hudson

IPO

31.4

Corero Network Security

Placing

3.3

Creo Medical

Placing

51.9

2020

February

Brickability

Placing for Promethean

c 20.0

FRP Advisory

IPO

70.0

March

Eden Research

Placing, subscription and open offer

10.0

Arena

Placing and subscription

9.5

April

Intelligent Ultrasound

Placing

5.2

Source: Cenkos, Edison Investment Research

Next we show the evolution of costs in more detail (Exhibit 3). The analysis shows the significant reduction in staff costs (42%, in line with revenue) and that the ratio of staff cost to revenue has been broadly stable over the period shown. Reorganisation costs of £1.3m in FY19 are related to the cost review mentioned above, which will result in a £3m saving in fixed staff, related IT and other costs in the current year.

Exhibit 3: Administrative cost analysis

£000 unless stated

2017

2018

2019

Staff costs

37,214

27,431

15,805

Other administrative costs

10,505

12,340

8,668

Reorganisation costs

715

1,507

1,281

Regulatory projects

1,094

536

47

Total administrative costs

49,528

41,814

25,801

Staff costs % of revenue

63

61

61

Other administrative costs % of revenue

18

27

33

Total admin costs % revenue

83

93

100

Source: Cenkos, Edison Investment Research

As noted above, the year-end cash of over £18m and surplus capital of £13.5m remain substantial. An analysis of the £15.3m cash outflow during the year is set out in the financial summary (Exhibit 9) but can be summarised as follows: after marginal earnings the deduction of nearly £4m of shares and options received in lieu of fees left an operating cash outflow of £1.8m; working capital movements (including payment of staff bonus in respect of 2018) and tax paid were a net negative of £9.4m; and dividends paid and share buybacks absorbed £3.7m. These items together with relatively small outflows in investing activities and lease payments resulted in the overall outflow. Large working capital fluctuations between years have been a regular feature of the cash flow statement reflecting the timing of transactions and lumpy cash receipts/payments, while fee payments in kind have also been a consistent and fluctuating element (the items are grouped together in our financial summary table).

Background and outlook

In this section we briefly show the equity market background including the early impact of the pandemic. The exceptionally uncertain outlook means we have not included estimates in this report but we discuss the impact of reduced costs for Cenkos and summarise what the company has been able to say about prospects so far.

Exhibit 4 shows how London Stock Exchange trading activity spiked to levels seen in the global financial crisis as the impact of the pandemic began to become evident and governments reacted. This has subsided to an extent but given the uncertainty of the development of the epidemic and its economic ramifications further periods of elevated volatility and activity are possible.

Exhibit 5 records the dramatic fall and bounce back in UK equity indices that has been seen in recent weeks. On a five-year view, AIM issuers (CBOE Alternative UK 100) and All-Companies indices are down c 25% from their peak levels while the small-cap index is down 32%.

Exhibit 4: LSE order book, average daily value traded

Exhibit 5: UK equity indices

Source: London Stock Exchange (Main Market)

Source: Refinitiv, CBOE indices

Exhibit 4: LSE order book, average daily value traded

Source: London Stock Exchange (Main Market)

Exhibit 5: UK equity indices

Source: Refinitiv, CBOE indices

The next two charts look at trends in equity issuance on the London Stock Exchange Main and AIM markets. Money raised was relatively subdued last year, particularly on AIM.

Exhibit 6: Main Market money raised, new and further

Exhibit 7: AIM money raised, new and further

Source: London Stock Exchange

Source: London Stock Exchange

Exhibit 6: Main Market money raised, new and further

Source: London Stock Exchange

Exhibit 7: AIM money raised, new and further

Source: London Stock Exchange

As the monthly data for April show, there has been a significant pick up in further issuance as companies react to the pandemic by strengthening their balance sheets, with the noticeable difference from the financial crisis being the broader sectoral exposure relative to the earlier period. The current month has seen additional issues to support companies in the current exceptional circumstances.

This is in tune with Cenkos comments that it has a good transaction pipeline (although the emphasis within this has changed, ie more towards companies seeking to support liquidity). It also notes it has continued to win new clients despite the absence of in-person meetings.

As set out above, Cenkos is characterised by a flexible business model where fixed costs are contained and variable staff costs provide incentives to staff while enabling the business to navigate even exceptional fluctuations in market activity such as those experienced currently. The reduction of fixed costs by £3m in the current year leaves the company potentially well placed to deal with a potential subdued period in activity but still with the capacity to serve clients. In this context, the fact that over 54% of staff have been with the firm for over five years provides continuity and a wide network of contacts that should prove helpful in current circumstances for both corporate and institutional clients.

As an illustration, reflecting the cost analysis shown in Exhibit 8 and allowing for the reduction in overheads, we estimate that fixed costs for the current year are likely to be running at around £18.5m, which suggests revenue could fall close to this level before a loss was incurred, while if we assume roughly unchanged revenues, pre-tax profit could be in the region of £0.8m.

Valuation

In the absence of estimates and with the immediate outlook so uncertain we tend to focus on the price to book ratio as a measure of valuation. This currently stands at just below 1x compared with a 10-year average of 2.3x (Exhibit 8).

Exhibit 8: 10-year history of price to book ratio

Source: Refinitiv, Edison Investment Research

While FY19 revenues were significantly below recent years and the return on equity is currently depressed, the five-year average ROE (including the marginal return for FY19) was 17% suggesting potential for significant upside in valuation once Cenkos is able to demonstrate its capabilities when market confidence begins to return in a sustained way. For balance it should be also be acknowledged that the background and confidence may yet weaken significantly but even in this circumstance, Cenkos’s favourable cash and regulatory capital position is an important supportive factor.

Exhibit 9: Financial summary

£000s

2015

2016

2017

2018

2019

Year end 31 December

PROFIT & LOSS

 

 

 

 

 

 

Revenue

76,513

43,743

59,504

44,953

25,916

Admininstration expenses (ex depreciation)

(56,510)

(38,581)

(49,286)

(41,567)

(25,530)

EBITDA

20,003

5,162

10,218

3,386

386

Depreciation

(241)

(182)

(242)

(247)

(271)

Operating profit

19,762

4,980

9,976

3,139

115

Investment revenues

134

83

23

103

30

Profit before tax

19,896

5,063

9,999

3,242

145

Tax

(4,525)

(1,858)

(1,815)

(805)

(101)

Profit after tax, continuing operations

15,371

3,205

8,184

2,437

44

Discontinued operations

0

(661)

(973)

0

0

Profit after tax

15,371

2,544

7,211

2,437

44

Average number of shares outstanding (m)

56.5

54.7

54.7

51.8

51.2

EPS continuing operations (p)

27.2

5.9

15.0

4.4

(0.2)

Fully diluted EPS (p)

26.8

4.6

13.2

4.4

(0.2)

Dividend per share (p)

14.00

6.00

9.00

4.50

3.00

NAV per share (p)

53.0

49.8

56.2

54.0

49.4

ROE (%)

43%

10%

25%

9%

0%

Cost/income ratio

74.2%

88.6%

83.2%

93.0%

99.6%

Staff costs/Revenue

60.1%

68.3%

63.7%

64.4%

63.6%

BALANCE SHEET

 

 

 

 

 

 

Non-current assets

1,626

625

1,263

1,179

5,611

Property, plant and equipment

296

389

525

558

517

Other non-current assets

1,330

236

738

621

5,094

Current assets

64,725

62,692

68,492

65,333

40,821

Other current assets inc Investments - long positions

12,706

13,811

10,615

12,648

8,973

Cash

33,106

23,795

36,829

33,635

18,333

Debtors and other

18,913

25,086

21,048

19,050

13,515

Current liabilities

(37,432)

(35,254)

(39,641)

(38,658)

(16,555)

Other current liabilities inc short positions

(2,551)

(2,694)

(3,341)

(6,018)

(1,840)

Other current liabilities

(34,881)

(32,560)

(36,300)

(32,640)

(14,715)

Non-current liabilities

(351)

(880)

(366)

(263)

(5,219)

Net assets

28,568

27,183

29,748

27,591

24,658

CASH FLOW

 

 

 

 

 

 

Operating cash flow

15,538

(465)

6,917

3,168

(1,818)

Working capital and other items

16,184

(1,387)

13,490

1,558

(9,051)

Tax paid

(5,049)

(2,533)

(1,334)

(1,664)

(351)

Net cash from operating items

26,673

(4,385)

19,073

3,062

(11,220)

Fixed asset investment

(174)

(272)

(378)

(280)

(197)

Acquisitions/disposals

0

0

0

0

(140)

Other investing activities

191

93

23

90

90

Share (purchase)/issuance

(16,823)

(438)

(549)

(2,353)

(1,277)

Ordinary dividends

(9,740)

(4,367)

(5,201)

(3,573)

(2,485)

Other financing

47

58

66

62

(73)

Net cash flow

174

(9,311)

13,034

(2,992)

(15,302)

Opening net (debt)/cash

32,932

33,106

23,795

36,627

33,635

Closing net (debt)/cash

33,106

23,795

36,829

33,635

18,333

Source: Cenkos, Edison Investment Research. Note: An accounting change for Cenkos’ Employee Benefit Trust, Deferred Bonus Scheme and Share Incentive Plan has resulted in a restatement for FY18 including a small change that means that opening cash does not equal closing cash for FY17. See page 55 of FY19 accounts for further detail.


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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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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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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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Secure Trust Bank — Caution after a fine 2019

Secure Trust Bank’s (STB) FY19 figures were good, as already flagged in its trading update. Underlying ROE was 14.0% (FY18: 12.8%), EPS was up 10% y o y and capital remained comfortable (CET1 12.7%). However, the COVID-19 pandemic has led to a significant drop in business activity and impairments are expected to increase. STB has suspended forward guidance since March due to uncertainty relating to the pandemic and subsequent economic recovery. Its relatively short duration loan book, already cautious lending stance and good capital position should help. Financial markets turmoil has the bank trading on a 2019 P/BV of 0.65x despite a track record of delivering value creating ROE above its COE.

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