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Research: Financials
Numis reported a particularly strong end to its financial year driven principally by capital markets activity. FY20 revenues are set to be nearly 12% ahead of our previous estimate resulting in a 42% increase in our pre-tax profit forecast. Looking ahead, the incidence of capital markets transactions remains uncertain but this prospective result tends to confirm the strength of the franchise and validate the investment the firm has made in resources to underpin client service and growth.
Written by
Numis |
Very strong end to the year |
FY20 trading update |
Financial services |
1 October 2020 |
Share price performance
Business description
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Analysts
Numis is a research client of Edison Investment Research Limited |
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Numis reported a particularly strong end to its financial year driven principally by capital markets activity. FY20 revenues are set to be nearly 12% ahead of our previous estimate resulting in a 42% increase in our pre-tax profit forecast. Looking ahead, the incidence of capital markets transactions remains uncertain but this prospective result tends to confirm the strength of the franchise and validate the investment the firm has made in resources to underpin client service and growth.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
130.1 |
38.3 |
25.9 |
12.0 |
11.4 |
4.1 |
09/18 |
136.0 |
31.6 |
23.0 |
12.0 |
12.8 |
4.1 |
09/19 |
111.6 |
12.4 |
8.1 |
12.0 |
36.3 |
4.1 |
09/20e |
150.8 |
34.8 |
24.7 |
12.0 |
11.9 |
4.1 |
Note: *PBT and EPS are on a reported basis and EPS is fully diluted.
Capital markets lead strong H2 performance
Numis’s trading update for the year ending September indicated that the strength in capital markets activity reported in July carried on through the final quarter of the year. After the Q320 update we estimated full-year group revenue of £135m, but, following a particularly strong September, revenue is set to be above £150m (FY19: £111.6m). Profits are expected to be materially higher than FY19 (£12.4m). High levels of capital markets activity have been driven by equity raising for retained corporate clients to address the impact of COVID-19 and to finance growth or acquisition opportunities. This more than offset subdued IPO and M&A activity. Also within Investment Banking, the global private markets activity has shown further growth and selective investment is being made in the area. Equities revenues in the second half have been maintained at a similar level to H120, even though market activity has subsided; continued strong trading profits, market share gains and a contribution from a new electronic trading product were positive factors. Our FY20 revenue estimate is increased to £150.8m and fully diluted EPS to 24.7p (£135m and 17.5p previously).
Positive start to FY21 expected
Numis notes that its pipeline, including private transactions, is growing at an encouraging pace and is now more diversified than seen initially following the onset of COVID-19. Consequently the group is looking for a good start to FY21 despite uncertainties connected with COVID-19, the US presidential election and Brexit.
Valuation
Numis shares trade on a price to NAV of 2.3x, which is above the 10-year average of 2.0x. However, on our return on equity (ROE)/cost of equity (COE) model, the current share price would be consistent with an assumed ROE of 17.7%, below the 19% implied on our forecast for FY20 and similar to the five-year average of 18%. The potential to gain further medium-term growth benefits from earlier investments in staff help underpin the valuation.
Trading background
The two charts below show the value of new and further issuance for the London Stock Exchange Main and AIM markets. Reflecting the influence of the pandemic, the value of Main Market new issuance, for the five months to end August, was 39% below the prior year period, but further issuance was up 87% leaving total issuance 54% ahead. On AIM the pattern was accentuated with new issuance down 56% and further issuance up 108%, resulting in a 78% increase in total issuance over the prior year period. As the last readings show, August was a relatively quiet month (in tune with Numis’s experience). As noted above, September was a particularly strong month for Numis and it indicates a promising pipeline for the first quarter of FY21.
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Exhibit 1: LSE Main Market new and further issuance |
Exhibit 2: LSE AIM new and further issuance |
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Source: London Stock Exchange |
Source: London Stock Exchange |
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Exhibit 1: LSE Main Market new and further issuance |
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Source: London Stock Exchange |
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Exhibit 2: LSE AIM new and further issuance |
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Source: London Stock Exchange |
Exhibit 3 illustrates recent equity market performance showing the initial impact of the onset of COVID-19 in March and subsequent recovery. The CBOE UK Alternative 100 (AIM issuers) index is down just 2% year to date, while the UK all-companies and UK small companies indices are down 22% and 25% respectively. Exhibit 4 shows the trend in London Stock Exchange order book trading; the elevated trading levels associated with the pandemic are clear, as is the reversion to more normal trading activity that followed, as noted by Numis.
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Exhibit 3: AIM, all-companies and small cap indices |
Exhibit 4: LSE order book, average daily value traded |
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Source: Refinitiv. Note: CBOE UK net-return indices. |
Source: London Stock Exchange (Main Market) |
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Exhibit 3: AIM, all-companies and small cap indices |
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Source: Refinitiv. Note: CBOE UK net-return indices. |
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Exhibit 4: LSE order book, average daily value traded |
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Source: London Stock Exchange (Main Market) |
Looking ahead, considerable uncertainties related to COVID-19 remain in place, with the outcome of the US presidential election and Brexit negotiations among other potentially significant influences on market sentiment and corporate confidence and activity.
Financials
Exhibit 5 shows the changes in key numbers from our revised FY20 estimates; further detail is given in the financial summary (Exhibit 7). As noted earlier the near 12% increase in assumed revenues flows through to 42% increases in pre-tax profit and earnings per share estimates.
Exhibit 5: Estimate changes
Revenue (£m) |
PBT (£m) |
EPS (p) |
DPS (p) |
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Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
|
09/20e |
135.0 |
150.8 |
11.7% |
24.6 |
34.8 |
41.6% |
17.5 |
24.7 |
41.6% |
12.0 |
12.0 |
0.0% |
Source: Edison Investment Research
As reported with the H120 result, the timing of the move to the company’s new London office at 40 Gresham Street has been affected by COVID-19. The lease is expected to begin in H121, but with relocation taking place in H221. The 50,000 square foot office will be c 60% larger than the existing one, providing capacity for growth over the term of the 15-year lease. Including the effect of implementation of IFRS 16, Numis expects this will increase ongoing costs from FY21 by £3m. In addition to this there will be fitout costs that we estimate could be in the region of £7–9m (based on a Cushman and Wakefield cost report). These costs will be amortised over the lease term (c £0.6m pa) and in cash terms would be broadly balanced by the benefit of a three-year rent-free period (we estimate c £9m in total). In addition there are likely to be exceptional costs relating to moving out of the Paternoster Square office; at this stage it is not certain which period these costs will fall into.
Valuation
Given the uncertainties surrounding estimates beyond FY20 we continue to focus on price to book value as a valuation measure. Exhibit 6 shows where this stands relative to the 10-year history with a current value of 2.3x compared with an average of c 2.0x.
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Exhibit 6: 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 valuation model to infer the ROE assumption required to match the 295p share price at time of writing gives a value of 17.7% (based on the H120 NAV of 129p and assuming a cost of equity of 10% and growth of 4%). This is below the 19% return implied by our estimate for FY20 and similar to the five-year historical average of 18%. The potential for further benefits to be realised from the investment in staff made from FY18 is supportive of medium-term growth prospects and hence the valuation.
Exhibit 7: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
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Year end 30 September |
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PROFIT & LOSS |
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Revenue |
|
|
97,985 |
112,335 |
130,095 |
136,047 |
111,610 |
150,750 |
Administrative expenses (excl. amortisation and depreciation) |
(65,018) |
(76,120) |
(83,626) |
(94,603) |
(85,432) |
(100,244) |
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Share based payment |
(4,104) |
(6,229) |
(10,454) |
(10,583) |
(10,914) |
(10,900) |
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EBITDA |
|
|
28,863 |
29,986 |
36,015 |
30,861 |
15,264 |
39,606 |
Depreciation |
|
|
(882) |
(1,126) |
(1,226) |
(1,113) |
(1,124) |
(2,894) |
Amortisation |
(111) |
(125) |
(89) |
(49) |
(44) |
(95) |
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Operating Profit |
|
|
27,870 |
28,735 |
34,700 |
29,699 |
14,096 |
36,617 |
Net finance income |
190 |
37 |
188 |
212 |
550 |
60 |
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Other operating income |
(1,978) |
3,759 |
3,431 |
1,733 |
(2,210) |
(1,904) |
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Profit before tax |
|
|
26,082 |
32,531 |
38,319 |
31,644 |
12,436 |
34,773 |
Tax |
(4,533) |
(6,132) |
(7,942) |
(4,967) |
(3,110) |
(6,607) |
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Profit after tax (FRS 3) |
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21,549 |
26,399 |
30,377 |
26,677 |
9,326 |
28,166 |
Average diluted number of shares outstanding (m) |
117.6 |
118.0 |
117.2 |
115.8 |
114.9 |
113.9 |
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EPS - basic (p) |
19.5 |
23.5 |
27.4 |
25.1 |
8.8 |
26.8 |
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EPS - diluted (p) |
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|
18.3 |
22.4 |
25.9 |
23.0 |
8.1 |
24.7 |
Dividend per share (p) |
11.50 |
12.00 |
12.00 |
12.00 |
12.00 |
12.00 |
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NAV per share (p) |
102.0 |
113.5 |
125.0 |
135.0 |
131.7 |
142.2 |
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ROE (%) |
19% |
22% |
23% |
19% |
6.6% |
19.6% |
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EBITDA margin (%) |
29.5% |
26.7% |
27.7% |
22.7% |
13.7% |
26.3% |
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Operating margin (before GW and except.) (%) |
28.4% |
25.6% |
26.7% |
21.8% |
12.6% |
24.3% |
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BALANCE SHEET |
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Fixed assets |
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6,724 |
5,522 |
6,147 |
8,215 |
6,832 |
9,671 |
Current assets |
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279,114 |
312,462 |
407,850 |
533,033 |
326,641 |
391,398 |
Total assets |
|
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285,838 |
317,984 |
413,997 |
541,248 |
333,473 |
401,069 |
Current liabilities |
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|
(170,319) |
(188,895) |
(280,371) |
(398,112) |
(195,319) |
(248,940) |
Long term liabilities |
0 |
(12) |
0 |
0 |
0 |
(2,736) |
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Net assets |
|
|
115,519 |
129,077 |
133,626 |
143,136 |
138,154 |
149,393 |
CASH FLOW |
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Operating cash flow |
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|
6,467 |
48,735 |
43,369 |
45,830 |
(2,748) |
51,406 |
Net cash from investing activities |
(3,632) |
84 |
(198) |
(1,014) |
(77) |
151 |
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Net cash from (used in) financing |
(17,510) |
(19,580) |
(36,359) |
(29,035) |
(24,646) |
(29,265) |
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Net cash flow |
|
|
(14,675) |
29,239 |
6,812 |
15,781 |
(27,471) |
24,016 |
Opening net (cash)/debt |
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|
(74,518) |
(59,591) |
(89,002) |
(95,852) |
(111,673) |
(84,202) |
FX effect |
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|
(252) |
172 |
38 |
40 |
0 |
0 |
Closing net (cash)/debt |
|
|
(59,591) |
(89,002) |
(95,852) |
(111,673) |
(84,202) |
(108,218) |
Source: Numis accounts, Edison Investment Research
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Research: Healthcare
Formycon continues to progress three core biosimilar projects. In H220, it is preparing the FYB201 (Lucentis biosimilar) EMA approval submission and helping in the resubmission of FYB201 to the FDA. FYB203 (Eylea biosimilar) entered Phase III in August. FYB202 (Stelara biosimilar, autoimmunity) is due to enter Phase III imminently. Development income from partners was €16.5m in H120, giving a loss of €1.4m and a cash outflow of €2.1m. Cash was €20.3m on 30 June.