Shore Capital Group — Adding scale and diversity

Shore Capital Group — Adding scale and diversity

Following an earlier announcement that it was in talks, Shore Capital has agreed to acquire Stockdale Securities. The combined company would have c 128 retained corporate clients, potentially ranking fourth in London on this measure. Both companies are profitable and the enlarged group will benefit from scale, increased client diversity and, we assume, some cost synergy. Given successful integration, the deployment of part of Shore’s available capital into an operating activity should benefit both returns and the valuation.

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Written by

Shore Capital Group

Adding scale and diversity

Acquisition agreed

Financial services

27 February 2019

Price

230p

Market cap

£50m

Net cash (£m) at end-June 2018

18.7

Shares in issue

21.6m

Free float

40.8%

Code

SGR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.2

(6.1)

(11.5)

Rel (local)

8.3

(7.5)

(11.4)

52-week high/low

285p

200p

Business description

Shore Capital Group is an independent investment group with three main areas of business: Capital Markets, Asset Management and Principal Finance (on-balance sheet investments). It has offices in Guernsey, London, Liverpool, Edinburgh and Berlin, and has over 160 staff serving 75 retained corporate broking and advisory clients.

Next events

FY18 results

March 2019

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Shore Capital Group is a research client of Edison Investment Research Limited

Following an earlier announcement that it was in talks, Shore Capital has agreed to acquire Stockdale Securities. The combined company would have c 128 retained corporate clients, potentially ranking fourth in London on this measure. Both companies are profitable and the enlarged group will benefit from scale, increased client diversity and, we assume, some cost synergy. Given successful integration, the deployment of part of Shore’s available capital into an operating activity should benefit both returns and the valuation.

Year end

Revenue (£m)

PBT
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15*

42.0

11.7

26.1

0.0***

8.8

N/A

12/16

39.4

2.4

5.8

5.0

39.8

2.2

12/17

41.9

4.6

12.8

10.0

18.0

4.3

12/18e

42.2

4.1

11.5

10.0

20.1

4.3

Note: *2015 figures include radio spectrum sale. **Fully diluted. ***There was a £10m share buyback in 2015.

Acquisition of Stockdale

Stockdale Securities (previously Westhouse Securities) is an investment banking and institutional stockbroking firm with 41 employees, 53 small and medium-sized corporate clients and dealing relationships with 200 institutional clients. It restructured in 2015 to focus its efforts primarily on winning and carrying out transactions for good quality corporate clients. Shore Capital sees Stockdale as complementary to its existing corporate advisory, broking, research, sales and trading expertise. The initial acquisition cash consideration is £4.9m with a maximum deferred cash consideration of £4.0m subject to reaching various revenue targets at the end of an 18-month period following completion. The price to book and earnings multiples to be paid, based on reported FY18 numbers, would be 0.9x and 4.1x, respectively, using the initial consideration only, or 1.6x and 7.5x on the maximum potential payment.

Background and outlook

Near-term corporate activity levels have been affected by the Q418 weakness in markets and macro uncertainties, but brokers like Shore Capital have been focused on client service to build their long-term franchises. The acquisition should further this aim, adding the expertise of the Stockdale team, including a specialist investment funds capability, and broadening the corporate client list. In its outlook comments in January, Stockdale noted that its medium-term pipeline was better than for some time and raised the possibility that, with expectations low, 2019 could be a much better year than some expect.

Valuation: Still cautious

Shore Capital shares continue to trade below book value, which appears cautious in the context of the potential growth in Asset Management and now the prospective benefits from the Stockdale acquisition.

Stockdale metrics compared

We have collated a number of metrics including revenue, the number of retained corporate clients and revenue per client and per staff member for Shore Capital, Stockdale and, for reference, Arden, Cenkos and Numis. This shows the different scale and financial profile of the businesses. Stockdale is closest in terms of size to Arden but the latter company recorded a loss in FY18 (albeit this was partly caused by restructuring and a second half profit was achieved on an underlying basis). Stockdale’s return on equity was over 20% and the valuation measures, even on the maximum potential consideration, do not appear demanding in this context (price to book 1.6x and price to earnings 7.5x). Revenue per corporate client of £214,000 was below our estimate for Shore Capital (and also below figures for Cenkos and Numis). Stockdale highlighted that while it completed 45 transactions during FY18, none of them generated a fee of over £1m, in contrast to FY17. This is likely to reflect a combination of market conditions and a natural variation in the incidence of corporate transactions within the client base. As noted earlier, the increase in the number of corporate clients through the acquisition should provide Shore Capital with greater diversity and potentially greater consistency in transaction revenues.

Exhibit 1: Comparative table for Shore Capital and Stockdale

Shore Capital

Stockdale

Arden

Cenkos

Numis

Year end

Dec

Sept

Oct

Dec

Sept

Revenue FY18 (£m)

42.2e

11.3

7.4

41.0e

136.0

Corporate clients

75

53

51

128e

210

Average staff

163

41

48

120e

253

Price to book (initial consideration for Stockdale, x)

0.73

0.86

0.23

1.43

1.94

Price to book (full consideration for Stockdale, x)

1.56

ROE (%)

4.4e

23.3

loss

5.7e

22.7

Revenue per corporate client (£)

341,333e

213,962

144,431

353,448e

647,619

Revenue per head (£)

257,055e

276,585

153,458

341,667e

537,549

Total staff cost per head (£)

129,552e

145,902

119,167

226,867e

297,731

Mkt cap or value/PBT (x)

10.9e

5.9

loss

19.0e

8.8

Mkt cap or initial consideration/earnings (x)

20.1e

4.1

loss

23.5e

11.2

Full consideration/earnings (x)

7.5

Source: Company releases, Edison Investment Research. Notes: Edison estimates marked “e”. Shore Capital revenue per corporate client based on Capital Markets revenue alone.

The recent history of Stockdale revenue, profit, and per client and per head revenues are shown in Exhibits 2 and 3. Profitability has clearly improved since the restructuring in 2015, with revenues per client and per head also ahead, although the figures for 2018 were below the 2017 level.

Exhibit 2: Stockdale revenue and profit history

Exhibit 3: Revenue per corporate client and per head

Source: Stockdale, Edison Investment Research

Source: Stockdale, Edison Investment Research

Exhibit 2: Stockdale revenue and profit history

Source: Stockdale, Edison Investment Research

Exhibit 3: Revenue per corporate client and per head

Source: Stockdale, Edison Investment Research

Our estimates for Shore Capital for FY18 are unchanged and we have not introduced a forecast for FY19 at this stage (FY18 results are due to be announced in March), so we have not formally modelled the potential impact of Stockdale on Shore Capital numbers. Near-term trading has been more challenging for Stockdale, as for other brokers; however, looking through this market fluctuation and assuming a reversion to more normal levels of corporate activity there would appear to be a high probability that the acquisition will have an enhancing impact on earnings and return on equity.

Other points on the transaction

The acquisition is subject to FCA approval, the timing of which is not fixed but we assume completion is likely before the end of Shore Capital’s first half.

The majority shareholder in Stockdale, with 55% of the company, is financial services investor Somers Ltd. Employees own the remaining 45%.

The Somers annual report for the period to September 2018 included a value of £4.1m for the investment in Stockdale and grossing this up gives a value for Stockdale as a whole of £7.5m.

The acquisition would take Shore Capital’s retained corporate client list to c 128 companies (potentially fourth largest in London behind JP Morgan, Numis and Peel Hunt).

Valuation

Our updated peer valuation is shown in Exhibit 4; the usual caveats over significant differences between the companies as well as the potentially volatile and lumpy nature of earnings apply. The historical Shore Capital P/E ratio is above the average, but this is based on reported earnings and current market conditions are likely to put capital markets earnings under pressure. In these circumstances, Shore Capital is likely to benefit relative to peers from the earnings contribution from its asset management activity. The price to book ratio at 0.9x is below the peer average (1.5x).

Exhibit 4: Quoted UK broker comparison

Price
(p)

Market
cap (£m)

Last reported P/E (X)

P/E FY1e
(x)

Yield
(%)

ROE last reported (%)

P/BV last reported (x)

Shore Capital

230

49

18.0

20.1

4.3

4.8

0.9

Arden Partners

27

8

Loss

N/A

0.0

N/A

0.9

Cenkos

68

37

5.1

N/A

5.9

25.3

1.4

Numis

259

274

11.2

15.2

4.6

19.3

1.9

WH Ireland

64

20

Loss

N/A

0.0

N/A

1.8

UK average

8.2

15.2

2.6

22.3

1.5

Source: Refinitiv, Edison Investment Research. Note: Prices as at 26 February 2019.

With the shares trading below book value (0.9x), the market price at time of writing of 230p implies a cautious assumption for return on equity of 7.3% within a ROE/COE model (other assumptions include a cost of equity of 8%, growth of 3% and a book value of 270.5p). While the implied return is above the H118 level (5.5% annualised) on a longer view this appears cautious and successful completion and execution of the integration of Stockdale would accelerate the move towards a higher sustainable return supporting the valuation.

Exhibit 5: Financial summary

Year end 31 December (£000s unless shown)

2012

2013

2014

2015

2016

2017

2018e

PROFIT & LOSS

Year to 31-Dec

Capital Markets

22,653

25,796

30,129

23,350

28,286

27,230

25,600

Asset Management

6,331

7,334

8,478

9,500

10,446

12,906

14,945

Principal Finance

3,837

2,635

1,968

9,102

676

1,760

1,690

Total revenue

32,821

35,765

40,575

41,952

39,408

41,896

42,235

Costs

(28,805)

(29,262)

(31,117)

(29,086)

(33,130)

(35,006)

(37,006)

EBITDA

4,016

6,503

9,458

12,866

6,278

6,890

5,228

Depreciation and amortisation

(1,114)

(1,102)

(1,064)

(1,039)

(1,046)

(892)

(814)

Share-based payments

(54)

0

(17)

(4)

(11)

(8)

(8)

Balance sheet impairments

(2,664)

(1,883)

0

Share of associates' results

0

805

0

Operating profit

2,848

5,401

8,377

11,823

2,557

4,912

4,406

Net interest

(321)

8

(68)

(126)

(152)

(335)

(260)

Other

0

0

0

0

0

0

0

Profit before tax

2,527

5,409

8,309

11,697

2,405

4,577

4,146

Tax

(494)

(1,100)

(1,804)

(1,002)

(554)

(912)

(761)

Non-controlling interests

(46)

(911)

(1,297)

(4,250)

(549)

(839)

(860)

Profit after tax (FRS 3)

1,987

3,398

5,208

6,445

1,302

2,826

2,525

Average number of shares outstanding (m)

24.2

24.2

24.2

23.8

21.8

21.7

21.6

Average, fully diluted no. of shares (m)

24.3

24.5

25.1

24.7

22.6

22.1

22.0

EPS (p)

8.2

14.1

21.6

27.1

6.0

13.0

11.7

EPS (p) fully diluted

8.2

13.9

20.8

26.1

5.8

12.8

11.5

Dividend per share (p)

5.0

8.0

10.0

0.0

5.0

10.0

10.0

EBITDA margin (%)

12.2

18.2

23.3

30.7

15.9

16.4

12.4

Operating margin (%)

8.7

15.1

20.6

28.2

6.5

11.7

10.4

NAV per share (p)

247.4

253.5

265.6

268.7

269.5

270.0

269.5

ROE (%)

3.4

5.6

8.3

9.2

2.2

4.8

4.4

BALANCE SHEET

Non-current assets

20,210

19,901

19,100

19,555

23,045

16,933

20,138

Intangibles and goodwill

4,436

4,406

4,002

2,222

2,516

2,610

2,613

Property, plant and equipment

11,669

10,897

10,969

10,864

9,423

7,699

7,428

Investments and other

4,105

4,598

4,129

6,469

11,106

6,624

10,097

Current assets

100,435

111,185

95,406

103,250

88,124

96,626

105,624

Bull positions

4,058

4,557

4,636

9,344

12,290

8,154

8,326

Cash

30,443

41,395

30,658

22,113

23,937

35,673

27,228

Debtors and other

65,934

65,233

60,112

71,793

51,897

52,799

70,070

Current liabilities

(43,441)

(52,883)

(32,445)

(45,972)

(33,316)

(46,323)

(55,646)

Bear positions

(1,395)

(1,033)

(846)

(946)

(765)

(1,017)

(564)

Short-term borrowings

(327)

(321)

(341)

(360)

(431)

(9,726)

(4,191)

Other current liabilities

(41,719)

(51,529)

(31,258)

(44,666)

(32,120)

(35,580)

(50,891)

Long-term liabilities

(10,817)

(9,241)

(9,640)

(9,791)

(10,768)

(66)

(2,060)

Long-term borrowings

(10,549)

(8,892)

(9,105)

(9,256)

(10,649)

0

(1,862)

Other long-term liabilities

(268)

(349)

(535)

(535)

(119)

(66)

(198)

Net assets

66,387

68,962

72,421

67,042

67,085

67,170

68,056

CASH FLOW

Net cash from operations

846

15,123

(7,181)

774

8,312

12,635

1,684

Fixed asset investment

(614)

(340)

(412)

(363)

(517)

(601)

(392)

Acquisitions/disposals

0

(1,731)

0

0

0

0

(826)

Other investing activities

93

297

211

7,121

(4,313)

4,099

(752)

Share issuance

0

0

0

0

0

1,530

0

Share purchases

0

0

0

(10,047)

0

(2,248)

0

Ordinary dividends

(604)

(2,175)

(2,175)

(1,208)

0

(2,167)

(2,158)

Other financing

(514)

230

(1,070)

(4,914)

(1,719)

(1,228)

(815)

Other

654

1,342

(574)

(530)

(1,894)

961

(1,958)

Net cash flow

(139)

12,746

(11,201)

(9,167)

(131)

12,981

(5,217)

Opening net (debt)/cash

19,696

19,567

32,182

21,212

12,497

12,857

25,947

FX

10

(131)

231

452

491

109

445

Closing net (debt)/cash

19,567

32,182

21,212

12,497

12,857

25,947

21,175

Source: Shore Capital accounts, Edison Investment Research

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This report has been commissioned by Shore Capital Group and prepared and issued by Edison, in consideration of a fee payable by Shore Capital Group. 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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This report has been commissioned by Shore Capital Group and prepared and issued by Edison, in consideration of a fee payable by Shore Capital Group. 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 Edison analyst 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.

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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

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Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

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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

Research: Healthcare

Oryzon Genomics — A year of data readouts

Oryzon has a total of five Phase II studies ongoing with its two lead assets iadademstat (formerly ORY-1001) and vafidemstat (formerly ORY-2001), which are all expected to have preliminary data readouts in 2019. In November 2018, the company announced the first patients had been recruited in to the iadademstat Phase IIa small cell lung cancer (CLEPSIDRA) and acute myeloid leukaemia (ALICE) studies. A scientific paper was recently published by a third party in Science Signalling, which has revealed a potential mechanism of action of iadademstat (ORY-1001) in pre-clinical SCLC models; this is supportive to Oryzon’s ongoing Phase II study in SCLC. Our valuation is slightly higher at €364m or €9.3/share.

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