Shore Capital Group — Navigating uncertainty

Shore Capital Group — Navigating uncertainty

2016 saw revenue progress in both of the core operating divisions of Capital Markets and Asset Management. Stripping out the inevitable volatile items with Principal Finance (radio spectrum licence sale in 2015 and asset write-downs in 2016), adjusted group revenue grew 21% and adjusted earnings at 13.4p (2015: 12.1p) were more than double the reported level. The progress illustrates the benefits of diversification and continuing investment in additional staff to strengthen the research franchise and support growth in asset management.

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Written by

Shore Capital Group

Navigating uncertainty

2016 results

Financial services

11 April 2017

Price

247.50p

Market cap

£54m

Net cash (£m) as at 31 December 2016

12.9

Shares in issue

21.8m

Free float

46.6%

Code

SGR

Primary exchange

AIM

Secondary exchange

Bermuda

Share price performance

%

1m

3m

12m

Abs

1.0

10.0

(25.6)

Rel (local)

0.6

8.2

(36.8)

52-week high/low

332.5p

217.5p

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 140 staff serving more than 60 corporate broking clients.

Next events

H117 results

September 2017

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

2016 saw revenue progress in both of the core operating divisions of Capital Markets and Asset Management. Stripping out the inevitable volatile items with Principal Finance (radio spectrum licence sale in 2015 and asset write-downs in 2016), adjusted group revenue grew 21% and adjusted earnings at 13.4p (2015: 12.1p) were more than double the reported level. The progress illustrates the benefits of diversification and continuing investment in additional staff to strengthen the research franchise and support growth in asset management.

Year end

Revenue (£m)

PBT
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

40.6

8.3

20.8

10.0

11.9

4.0

12/15*

42.0

11.7

26.1

0.0***

9.5

N/A

12/16

39.4

2.4

5.8

5.0

42.7

2.0

12/17e

41.8

5.5

13.1

10.0

18.9

4.0

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

2016 results

Revenue growth of 21%, excluding the radio spectrum sale from 2015, is a creditable performance given periods of uncertainty around the EU referendum vote and the US elections during the year. Further excluding the £2.7m of asset write downs in 2016 adjusted PBT increased by 18% and, despite a significant minority interest in the profit growth, adjusted EPS advanced by 11% (adjusted ROE 5%). Capital Markets grew revenues by 21%, pre-tax profits by 45%, and the margin increased from 20.1% to 24.0%. Asset Management revenues grew 10% but PBT of £2.0m was 25% lower as a result of investment to increase growth capacity. A dividend of 5p per share has been declared.

Market background and outlook

Markets have maintained a positive tone in recent months, although as always uncertainties abound (Brexit negotiations, new US administration) both from an economic and political perspective. Shore Capital successfully navigated uncertainties in 2016 and views the current year with optimism. For the Capital Markets business, management seeks to benefit from intermediation between corporates that it sees as being willing and eager to invest to grow their businesses, and institutions that remain sufficiently confident about investment prospects. For Asset Management the group seeks further substantial growth in AUM, for which investments in capacity have already been made.

Valuation: Positive trends but still below book

The current (c 5%) ROE, dampened by the strong balance sheet, is below our cost of equity assumption (8%). Assigning a sustainable ROE for our ROE/COE valuation is made difficult by the potential swings in stock market-related earnings and the occasional but substantial contributions from principal investments, but on a longer view we would expect this to be above the current level. Assuming a 9% return gives a value of c 359p (was 360p) compared with the 270p book value.

Company description

Shore Capital is an independent investment group with three main areas of business: Capital Markets, Asset Management, and Principal Finance. Capital Markets and Asset Management provide recurring revenue streams that have averaged c 90% of total group revenues over the past five years.

Capital Markets is the larger of the two (an average 69% of group revenues over five years) and comprises four elements: market making, research-led broking, corporate finance and, since the end of 2015, a fixed income team previously at Edmond de Rothschild.

The Asset Management segment has two parts: private client and institutional funds. The private client area is a specialist in tax efficient funds and products including limited-life venture capital trusts (VCTs), Enterprise Investment Schemes (EIS) and products intended to provide shelter from inheritance tax through business property relief. The institutional side of the activity advises Puma Brandenburg and Brandenburg Realty (both real estate companies investing in German properties), St Peter Port Capital (a fund now focused on realising liquidity or value from its remaining holdings), and a recently launched joint venture with two family offices in the US that will focus on real estate opportunities in the supported living sector, called Puma Social Care Investments Ltd (see page 5).

Principal Finance invests the group’s own capital on an opportunistic basis seeking attractive longer-term returns but with higher volatility in reported contribution from year to year. Its potential to generate substantial profits was demonstrated in 2015 when the sale of German radio frequency spectrum licences generated net revenue of £9.2m. The group’s 32 remaining regional licences have a book value of £2.1m.

Having founded the group in 1985 and subsequently led its growth and development, Howard Shore has announced that he will step back from his operational duties as chief executive. He will remain as executive chairman but will be focused on the group’s international strategy and developing new relationships as well as investment opportunities. His replacements as joint chief executives, Simon Fine (chief executive of Shore Capital Markets) and David Kaye (chief executive of Asset Management), have both been closely involved with the development of the group over a number of years.

2016 results and divisional summary

Despite the year spanning periods of uncertainty around the EU referendum vote and the US elections, Shore Capital achieved revenue progress in both of the core operating businesses of Capital Markets and Asset Management. In both businesses, management invested to position them for improving market conditions and further expected growth. At the group level the Principal Finance division, lumpy by nature from one period to another in the pursuit of attractive long-term returns on capital invested, creates considerable noise in reported profits. Exhibit 1 shows the adjusted position, before the impact of last year’s radio spectrum realisation (£9.4m) and this year’s asset impairments (£2.7m). On this adjusted basis, group revenues increased 21% on the year and adjusted pre-tax profits rose by 18% from £4.3m to £5.1m. Adjusted earnings per share also increased, by 11% to 13.4p. The smaller increase in EPS compared with adjusted PBT reflects the minority share in both the Spectrum gain and, to a lesser extent, this year’s asset impairments. A dividend of 5p per share (2015 nil) has been declared.

Exhibit 1: Results summary

£000s unless otherwise stated

2016

2015

Change

Revenues

Capital Markets

28,286

23,350

21%

Asset Management

10,446

9,500

10%

Principal Finance - exc Spectrum

676

(298)

N/A

Adjusted revenues

39,408

32,552

21%

Principal Finance - Spectrum

9,400

Reported total revenues

39,408

41,952

-6%

PBT

Capital Markets

6,787

4,693

45%

Asset Management

1,980

2,653

-25%

Central costs

(2,119)

(788)

N/A

Principal Finance - exc Spectrum & impairment

(1,579)

(2,261)

N/A

Adjusted PBT

5,069

4,297

18%

Principal Finance - Spectrum & impairment

(2,664)

7,400

Reported total PBT

2,405

11,697

-79%

PBT margin %

Capital Markets

24.0%

20.1%

Asset Management

19.0%

27.9%

EPS (p)

Basic

6.0

27.1

-78%

Diluted

5.8

26.1

-78%

Adjusted

13.4

12.1

11%

Source: Shore Capital, Edison Investment Research

Capital Markets

Capital Markets grew revenues by 21% and pre-tax profits by 45% with the margin increasing from 20.1% to 24.0%. Given uncertain market conditions during much of the year (reviewed in detail in the following section) this is a very strong performance in a sector context as well as in absolute terms.

Exhibit 2 lists selected transactions and brokership appointments during 2016 and 2017 to date. A total of 11 new retained corporate clients were added during 2016 (including Dairy Crest plc, Chesnara plc, Motorpoint Group plc, Stride Gaming plc, and Earthpoint plc) taking the year-end number to 66. The team was active on a range of capital markets transactions including four IPOs, 20 secondary fund-raisings, and a number of significant transactions including acting as co-lead manager on the £370m placing and open offer equity element of a $1.2bn financing by Sirius Minerals plc, and co-lead manager on a £329m placing by Playtech plc. Advisory work included acting as corporate broker to Poundland Group plc in connection with its £610m takeover by Steinhoff International, and acting as joint financial adviser and joint broker to Market Tech Holdings Ltd in connection with its move from AIM to the Main Market.

Exhibit 2: Corporate finance selected recent transactions and appointments

Company

Transaction/event

Value

Role

Date

2017

TLOU Energy

Appointment

Mkt cap £18.4m

As joint broker

Mar-17

Ultimate Products

Main market listing

Mkt cap £105.2m

As sponsor, global co-ordinator, joint bookrunner

Mar-17

Union Jack Oil

Placing

£1.4m

Nomad and joint broker

Feb-17

Staunton Holdings Ltd

Recommended offer

£37.3m

Financial adviser

Feb-17

NetPlayTV

Recommended offer

£26.4m

Joint financial adviser

Feb-17

Kennedy Ventures plc

Placing

£1.25m

Sole broker

Jan-17

2016

Richland Resources Ltd

Appointment

Mkt cap £1m

Sole broker

Dec-16

Chesnara

Placing & open offer

£160m

Sponsor and joint bookrunner

Nov-16

Sirius

Placing as part of capital raise

£370m

Co-lead manager

Nov-16

Inspired Energy

Placing

£5m

Nomad and joint bookrunner

Oct-16

Ironveld

Placing

£1.8m

Nomad and sole broker

Oct-16

Poundland

Recommended offer

£610m

Broker

Sep-16

Applegreen

Placing

£23m

Joint bookrunner

Sep-16

Victoria Oil & Gas

Appointment

Mkt cap £42m

As joint broker

Aug-16

Stride Gaming

Placing

£27m

Joint bookrunner

Jul-16

Kennedy Ventures

Placing

£2m

Sole bookrunner

Jul-16

SYS Group

Placing

£5m

Nomad and sole bookrunner

Jul-16

NextEnergy Solar Fund

Placing

£43m

Joint bookrunner

Jul-16

Aminex

Placing

$22m

Sole bookrunner

Jul-16

Daily Internet

Placing/acquisition

£5m

Broker

Jun-16

Motorpoint Group

Main Market IPO/placing

£100m

Co-bookrunner

May-16

Canadian Overseas petroleum

Appointment

Mkt cap £18.7m

UK broker

May-16

Chesnara

Appointment

Mkt cap £385m

As joint broker

May-16

Vernalis

Placing

£40m

Joint bookrunner

Apr-16

Stride Gaming

Appointment

Mkt cap £120m

As joint broker

Apr-16

Amryt Pharmaceuticals

Placing and AIM IPO

£10m

Lead manager, Nomad, joint broker

Apr-16

Eden Research

Placing

£2.6m

Lead manager

Mar-16

Yu Energy

Placing and AIM IPO

£10m

Nomad and sole broker

Mar-16

Cerillion

Placing and AIM IPO

£10m

Nomad and sole bookrunner

Mar-16

Daily Internet

Appointment

Mkt cap £9m

Nomad and joint broker

Feb-16

Earthport

Appointment

Mkt cap £125m

As joint broker

Feb-16

Dairy Crest

Appointment

Mkt cap £830m

As joint broker

Feb-16

Market Tech

Move to Main Market

Mkt cap £850m

As joint broker

Jan-16

Source: Shore Capital Group

Additional resources were added to the research and distribution capability, adding stock coverage in building materials, healthcare, industrials, media, and technology. Not directly related to research and sales, but indicative of ongoing investment, the overall Capital Markets headcount increased from an average 83 in 2015 to 88 in 2016. Management anticipates ongoing demand from portfolio managers for good quality research and seeks to position its offering where it can best add value in a post-MiFID II environment.

The fixed income team made a positive contribution in its first full year since joining from Edmond de Rothschild in late 2015.

Figures for the market-making activity within Capital Markets are not broken out, but the company indicates that in an environment marked by periods of considerable market volatility both revenues and profits increased by double-digit percentages. Shore Capital trading volumes increased by 12%, reinforcing its position as the third largest maker on the LSE. Management indicates that prudently positioned inventory enabled Shore to provide significant liquidity at key times such as the immediate aftermath of the EU referendum and the US elections. The year-end balance sheet net bull position increased from £8.4m to £11.5m.

Asset Management

Revenues in the Asset Management division grew by 10% but PBT was 25% lower at £2.0m as a result of investment that included several key hires, particularly in the private client area adding to the growth capacity of the business and investment teams. The average headcount of the division increased from 51 to 58 during the year. Total assets under management (AUM) increased from approximately £770m at 2015 year end to £825m at year end 2016.

On the institutional side of the business, the German advisory business assisted Brandenburg Realty in the completion of a second acquisition, a €32m commercial and residential portfolio in the city of Potsdam near Berlin, and continues to seek and advise on additional acquisition opportunities to the fund. The advisory team also helped Puma Brandenburg to complete a €90m refinancing during the first half of the year and continues to assist in the implementation of its strategic objectives. Advisory work for the Puma Brandenburg portfolio during the year included advice on the sale of a housing estate and development works at its flagship Hyatt Regency Hotel in Cologne. Subsequent to the full year results, Shore Capital has announced the launch of a new joint venture (Puma Social Care Investments Ltd or PSCI) with two family offices in the US to focus on real estate opportunities in the supported living sector. The partners have committed £21 million to the venture and Shore Capital's commitment of £7 million will be partly provided through the injection of £5.8 million of supported living assets already held on the Group's balance sheet (including a £2.9m of investment property acquired before the 2016 year end). PSCI intends to acquire an already identified initial pipeline of property assets with an aggregate value of £50 million but believes that a substantial opportunity exists to grow the asset base further, once the first tranche of purchases have been completed. Shore Capital will provide advisory services to the joint venture through its majority-owned subsidiary Puma Investment Management Ltd (PIML) which will earn an annual advisory fee set at 0.85% of the gross value of properties held by PSCI, and will also receive an acquisition fee on each property purchase of up to 1.0% of the purchase price.

In the private client area, AUM increased to £200m (2015: £155m). Contributing to this increase, the Puma VCT 12 (tax year 2015/16) had raised £31m at closure, accounting for more than half the total funds raised in the limited-life VCT market as a whole. Since 2005 a total of £223m has been raised for Puma VCT funds and £89m returned to investors. The first five funds have been repaid and have each returned the highest total return of their respective peer-groups. A number of changes to VCT rules were introduced with effect from April 2016. VCTs are no longer able to invest in firms that are more than seven years old with potential implications for dividend streams from investee companies; some transactions, like management buy-outs, are no longer permitted; and VCTs can no longer put more than £12m into any one company. The list of excluded activities was also broadened and now includes energy generation. In view of the rule changes, Shore decided to delay the launch of its latest Puma VCT 13 pending clarifications in guidance notes that are yet to be issued by HMRC. Management expects to launch Puma VCT 13 in the 2017/18 tax year and remains positive about market prospects. Changes to pension rules have further reduced the lifetime pension allowance and the annual tax-free contribution allowance for high earners, and seem likely to increase interest in other forms of tax efficient investment such as VCTs.

The Puma Heritage fund, which was launched in June 2013 and is designed to offer full relief from inheritance tax after two years, passed its third anniversary and has seen a notable acceleration in its NAV. Subscriptions from new shareholders combined with investment returns have increased the company’s net assets to £28m as of the 2016 year end. Puma Heritage has participated in 384 loans up to the end of 2016 totalling £162m of which 38 of the loans remained live with the balance having been repaid. The investment team reports a strong pipeline of loans to deploy funds from current and future investors without weakening selection criteria and Puma Heritage expects to be able to show significant further growth.

The Puma EIS service was launched in November 2013 providing the opportunity to invest in asset-backed Enterprise Investment Scheme qualifying companies supported by the expertise, knowledge and skills built up in the management of the Puma VCTs. AUM has now reached £47m, with investments made in seven portfolio companies with a good pipeline of further opportunities. The Puma AIM Inheritance Tax Service, a discretionary portfolio service that seeks to mitigate inheritance tax by investing through AIM-listed shares, passed its two-year anniversary. Management reports a 43.9% return since launch in July 2014 to the end of 2016, outperforming the FTSE AIM All-Share Index by 36.3%.

Principal Finance

The reported PBT loss of £4.2m included a £2.7m pre-tax write down (£1.6m after tax and minority interests) relating to various assets held within the division. The balance sheet shows overall Principal Finance investments increasing by £1.9m to £8.2m during the year. Included within these assets, and not affected by the write downs, is the group’s 59.94% holding in Spectrum Investments Limited, the parent company of Deutsche Broadband Dienste (DBD), which in 2015 sold one national and six regional German radio spectrum licences to Deutsche Telecom for €15.45m, generating a gain (revenue) of €12.5m/£9.2m. DBD still owns 32 regional radio spectrum licences in Germany that cover some of Germany’s largest metropolitan centres including Berlin, Leipzig, Dresden, Düsseldorf and Hanover, and give the right to use the 3.5 GHz range of frequencies (which are increasingly being used to supplement data capacity for 4G services) in perpetuity. DBD has recently been given consent by the German telecoms regulator to test the LTE TDD (3.5 GHz) technology with which it seeks to support its plans for the future use of the licences, premised upon a small radio cells network concept, and a pilot scheme in Berlin is underway. Further progress is subject to the technology being incorporated into handsets and negotiation with the German regulator, which has yet to confirm its agreement for further pilot schemes and the potential rollout of services. The group’s investment in Spectrum Investments Limited is recorded in the year-end balance sheet as an intangible asset with a gross value, before minorities, of £2.1m.

Market background and outlook

Trends in new and follow-on issuance on the AIM and LSE Main markets have been mixed over the last year (Exhibits 3 and 4). AIM new and further issuance was 13% lower (£4.8bn) during 2016 compared with 2015, held back in part by uncertainty surrounding the Brexit vote, but a recovery was evident in H216. The Main Market followed a broadly similar pattern but with a steeper decline and a more muted H216 recovery.

Ahead of the financial crisis, new issuance on AIM peaked at over £16bn (in 2007), followed by a dramatic slowdown in the volume of IPOs. In the subsequent recovery, the level of new issuance has so far remained comparatively muted.

Exhibit 3: LSE Main Market issuance

Exhibit 4: LSE AIM issuance

Source: LSE

Source: LSE

Exhibit 3: LSE Main Market issuance

Source: LSE

Exhibit 4: LSE AIM issuance

Source: LSE

Turning to mergers and acquisitions (M&A) activity, the value of UK transactions collected by the Office for National Statistics saw a sharp increase in 2016 with the total value (Exhibit 5) more than three times the prior year, but this was primarily the result of a few very high value inward transactions. Looking at domestic and outward deals alone there was a strong rise of 25%, but the value was within the range seen in recent years.

Exhibit 5: UK merger and acquisition activity

Source: Office for National Statistics

While the market environment clearly has an influence on the level of transactions activity that may be expected for Shore Capital or any other individual firm, the incidence of activity among clients and the ability to successfully win that business (Exhibit 2) are equally important.

Turning to trading activity and market levels, although the 3.6% increase in the average value traded on the LSE order book was lower than in previous years, it included a marked recovery in H216 from the 3.7% H116 decline (Exhibit 6). Equity returns as represented by the FTSE All-Share, FTSE AIM All-Share and FTSE Small Cap indices are shown in Exhibit 7. The strength of the rebound post Brexit vote and support from the ‘Trump bounce’ are evident. The chart also shows outperformance by small caps over the period and significant relative weakness of the AIM Index, explained in part by weakness in commodity stocks within the index.

Shore Capital Chairman Howard Shore is a proponent of the benefits to be derived from the increased flexibility the UK should have outside the EU and the potential to lighten regulatory burdens.

Exhibit 6: Average daily value traded LSE order book

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Source: LSE

Source: Thomson Datastream

Exhibit 6: Average daily value traded LSE order book

Source: LSE

Exhibit 7: FTSE AIM, All-Share and Small Cap indices

Source: Thomson Datastream

As discussed above, Shore Capital enjoyed a successful year in its market making activities, which it attributes to prudently positioning its inventory so as to be able to provide significant liquidity at key times such as the immediate aftermath of the EU referendum and the US elections. Exhibit 8 shows the considerable spike in volatility that occurred in 2016 around the outcomes of the EU referendum and US presidential election, both of which ran counter to consensus expectations.

Exhibit 8: FTSE 100 volatility index

Source: Thomson Datastream

Uncertainties but positive signals too

Looking ahead, newsflow on the terms of Brexit could cause fluctuations in market sentiment that would in turn have an impact on market levels and corporate activity. However, while this will be a factor, the resilience shown by the UK economy and the fact that market levels are higher than might have been expected at the time of the vote creates a relatively positive backdrop for corporate activity including M&A, IPOs and follow-on issuance.

Turning to the outlook for Shore Capital, we are left with lack of clarity on the overall environment but encouragement from the progress made in terms of continuing to add new corporate clients in the Capital Markets area and expanding AUM for Asset Management. As we indicate in the next section, we look for further growth in both of these core operating divisions in the current year.

Financials

Adjusting for the £2.7m pre-tax value of asset value impairments within Principal Finance, the 2016 revenues and earnings were ahead of our estimates and the 5p dividend in line:

Revenue £39.4m versus our estimated £35.5m.

Adjusted pre-tax profit £5.1m versus our estimated £4.9m.

Adjusted net attributable profit £2.9m versus our estimated £2.6m

Dividend per share 5p, as forecast.

The balance sheet and liquidity remain strong with year end cash of £23.9m, £8.8m of gilts and bonds and a £20m working capital debt facility that was undrawn at that point. Net cash was £12.9m, slightly ahead of the £12.5m 2015 closing level and ahead of the £5.5m at the 2016 interim stage.

Our first time 2017 estimates are shown in detail in Exhibit 12. For the Capital Markets business, management views the prospects positively, seeking to benefit from intermediation between corporates that it sees as being willing and eager to invest to grow their businesses, and institutions that remain sufficiently confident about investment prospects. For Asset Management the group seeks further substantial growth in AUM for which investments have already been made.

We look for 2017 revenue growth in both Capital Markets (+6%) and Asset Management (+13%), sufficient to offset the full year cost impact of the 2016 investment and leaving margins in both businesses at a similar level compared to 2016. We have assumed no realisation events and no impairment within Principal Finance, such that a small amount of recurring revenue is more than offset by recurring divisional costs.

Given the strength of the balance sheet, we make the assumption that the majority of the 2017 earnings will be distributed by way of dividends. We look for DPS of 10p compared with fully diluted EPS of 13.1p and for net cash to increase with profit retention to £14.5m.

Valuation

Our updated peer valuation is shown in Exhibit 9 with a reminder that caution is needed when considering this comparison given quite significant differences between the companies as well as the potentially volatile and lumpy nature of earnings across the sector.

Since we last published on the interim results in late September 2016 there has been relatively little movement in the peer average price-to-book ratio or for Shore Capital, which continues to trade at a discount (0.9x) to the average (1.6x). The Shore Capital historic P/E of 42.7x is high relative to profitable peers, in part reflecting the impact on its historic earnings from asset write downs, which also affect reported ROE (2.2%). Using the adjusted EPS shown in Exhibit 1 (13.4p) the historic P/E ratio is 18.5x and the ROE increases to 5.0%, still below the ROEs reported by Cenkos and Numis, although further gains from Principal Finance remain a possibility (the 2015 gain boosted group ROE to 9.2%). Including the uplift on the acquisition of Puma Brandenburg Limited in 2009, Shore Capital’s average return on equity between 2007 and 2016 was 12.3%, a period that also included the financial crisis and a small negative return in 2011.

Panmure Gordon has just reported 2016 results showing a return to profit (£1.5m PBT) after a PBT loss of £18.9m in 2015, including £13.2m in goodwill impairment. Its current rating also reflects the recent agreed bid from Atlas Merchant Capital (the private equity vehicle of Bob Diamond) and QInvest, the Qatari investment bank, which already owned a 43% stake.

Exhibit 9: Quoted UK broker comparison

Price (p)

Market cap (£m)

Last reported P/E ratio (x)

Price to book (x)

Yield (%)

ROE (%)

Shore Capital

247.5

53.9

42.7

0.9

2.0

2.2

Arden

34

6.6

1.0

0.0

-6.3

Cenkos

97

55.0

20.6

1.9

6.2

10.0

Numis

262

297.1

11.1

2.4

4.6

21.6

Panmure Gordon

98

15.2

12.6

0.8

0.0

7.5

WH Ireland

135

37.1

3.0

0.0

-22.3

Average

21.8

1.7

2.1

2.1

Source: Bloomberg, Edison Investment Research. Note: Prices as at 7 April 2017.

We have not made any changes to the assumptions in our ROE/COE valuation model, with the central value for sustainable return (9%) set above the 8% cost of equity and growth at 5%. The result is a central value of c 359p (was 360p), very slightly reduced by the updated NAV per share. Given the difficulty of estimating earnings for a broking/investment banking business, selecting an appropriate sustainable return on equity is equally difficult. The sensitivity table below shows a range of indicated values based on different assumptions for cost of equity and return on equity.

Exhibit 10: ROE/COE valuation output variations (value per share, p)

Cost of equity

7.0%

7.5%

8.0%

8.5%

10.0%

Return on equity

6.0%

135

108

90

77

54

8.0%

404

323

270

231

162

9.0%

539

431

359

308

216

10.0%

674

539

449

385

270

12.0%

943

755

629

539

377

Source: Edison Investment Research

For reference, we include a final table in this section summarising the recent performance of the peer group. Average year-to-date performance is materially affected by the bid for Panmure Gordon. Excluding Panmure Gordon shows Shore Capital very slightly ahead of the average (+10.0% vs +9.2%) and narrows but does not eliminate the gap with the peer average over one year (Shore
-27.2% versus average -18.9%). With the 2016 results somewhat ahead of our expectation, and with a confident outlook from management, this could indicate the potential for an improved sector relative performance, particularly given any catalyst from positive stock-specific news or more general market sentiment.

Exhibit 11: Share price performance comparison (%)

1 month

3 months

1 year

YTD

From 12m high

Shore Capital

1.0

10.0

-25.6

10.0

-25.6

Arden

1.5

1.5

25.9

1.5

-4.2

Cenkos

3.7

22.0

-21.5

34.7

-34.9

Numis

-4.7

7.9

26.6

6.6

-9.8

Panmure Gordon

67.5

40.0

66.1

70.4

-3.4

WH Ireland

3.1

10.7

47.5

10.7

-5.9

Average

12.0

15.3

19.9

22.3

-14.0

Source: Bloomberg, Edison Investment Research. Note: Prices as at 7 April 2017.

Exhibit 12: Financial summary

Year end 31 December

2010

2011

2012

2013

2014

2015

2016

2017e

PROFIT & LOSS

Capital Markets

26,268

22,545

22,653

25,796

30,129

23,350

28,286

29,850

Asset Management

9,952

8,563

6,331

7,334

8,478

9,500

10,446

11,795

Principal Finance

(737)

(1,595)

3,837

2,635

1,968

9,102

676

200

Total revenue

35,483

29,513

32,821

35,765

40,575

41,952

39,408

41,845

Costs

(25,673)

(29,163)

(28,805)

(29,262)

(31,117)

(29,086)

(35,794)

(35,204)

EBITDA

9,810

350

4,016

6,503

9,458

12,866

3,614

6,641

Depreciation and amortisation

(921)

(868)

(1,114)

(1,102)

(1,064)

(1,039)

(1,046)

(896)

Share-based payments

(161)

(52)

(54)

0

(17)

(4)

(11)

(10)

Operating profit

8,728

(570)

2,848

5,401

8,377

11,823

2,557

5,735

Net interest

(359)

(354)

(321)

8

(68)

(126)

(152)

(210)

Other

0

49

0

0

0

0

0

0

Profit before tax

8,369

(875)

2,527

5,409

8,309

11,697

2,405

5,525

Tax

(1,977)

(189)

(494)

(1,100)

(1,804)

(1,002)

(554)

(1,160)

Non-controlling interests

(1,872)

(24)

(46)

(911)

(1,297)

(4,250)

(549)

(1,400)

Profit after tax (FRS 3)

4,520

(1,088)

1,987

3,398

5,208

6,445

1,302

2,965

Average number of shares outstanding (m)

24.7

24.3

24.2

24.2

24.2

23.8

21.8

21.8

Average, fully diluted no. of shares (m)

25.5

24.8

24.3

24.5

25.1

24.7

22.6

22.6

EPS (p)

18.3

(4.5)

8.2

14.1

21.6

27.1

6.0

13.6

EPS (p) fully diluted

17.7

(4.4)

8.2

13.9

20.8

26.1

5.8

13.1

Dividend per share (p)

8.8

5.0

5.0

8.0

10.0

0.0

5.0

10.0

EBITDA margin (%)

27.6

1.2

12.2

18.2

23.3

30.7

9.2

15.9

Operating margin (%)

24.6

-1.9

8.7

15.1

20.6

28.2

6.5

13.7

NAV per share (p)

262.3

242.5

247.4

253.5

265.6

268.7

269.5

276.7

ROE (%)

6.7

-1.8

3.4

5.6

8.3

9.2

2.2

5.0

BALANCE SHEET

Non-current assets

24,598

21,653

20,210

19,901

19,100

19,555

23,045

22,749

Intangibles and goodwill

381

4,632

4,436

4,406

4,002

2,222

2,516

2,444

Property, plant and equipment

12,710

12,516

11,669

10,897

10,969

10,864

9,423

9,199

Investments and other

11,507

4,505

4,105

4,598

4,129

6,469

11,106

11,106

Current assets

113,210

98,113

100,435

111,185

95,406

103,250

88,124

90,990

Bull positions

11,201

7,048

4,058

4,557

4,636

9,344

12,290

12,510

Cash

44,249

47,305

30,443

41,395

30,658

22,113

23,937

25,655

Debtors and other

57,760

43,760

65,934

65,233

60,112

71,793

51,897

52,825

Current liabilities

(42,439)

(26,758)

(43,441)

(52,883)

(32,445)

(45,972)

(33,316)

(33,906)

Bear positions

(1,343)

(786)

(1,395)

(1,033)

(846)

(946)

(765)

(779)

Short-term borrowings

(339)

(345)

(327)

(321)

(341)

(360)

(431)

(431)

Other current liabilities

(40,757)

(25,627)

(41,719)

(51,529)

(31,258)

(44,666)

(32,120)

(32,696)

Long-term liabilities

(25,596)

(27,579)

(10,817)

(9,241)

(9,640)

(9,791)

(10,768)

(10,768)

Long-term borrowings

(25,424)

(27,264)

(10,549)

(8,892)

(9,105)

(9,256)

(10,649)

(10,649)

Other long-term liabilities

(172)

(315)

(268)

(349)

(535)

(535)

(119)

(119)

Net assets

69,773

65,429

66,387

68,962

72,421

67,042

67,085

69,065

CASH FLOW

Net cash from operations

(2,750)

4,225

846

15,123

(7,181)

774

8,312

4,495

Fixed asset investment

(570)

(525)

(614)

(340)

(412)

(363)

(517)

(600)

Acquisitions/disposals

0

(914)

0

(1,731)

0

0

0

0

Other investing activities

(4,916)

459

93

297

211

7,121

(4,313)

145

Share issuance

484

166

0

0

0

0

0

0

Share purchases

(3,419)

(946)

0

0

0

(10,047)

0

0

Ordinary dividends

(2,154)

(2,132)

(604)

(2,175)

(2,175)

(1,208)

0

(2,395)

Other financing

(1,525)

824

(514)

230

(1,070)

(4,914)

(1,719)

0

Other

(337)

(187)

654

1,342

(574)

(530)

(1,894)

0

Net cash flow

(15,187)

970

(139)

12,746

(11,201)

(9,167)

(131)

1,646

Opening net (debt)/cash

33,637

18,486

19,696

19,567

32,182

21,212

12,497

12,857

FX

36

240

10

(131)

231

452

491

0

Closing net (debt)/cash

18,486

19,696

19,567

32,182

21,212

12,497

12,857

14,503

Source: Shore Capital accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Shore Capital Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

StatPro Group — Value-enhancing deal at a modest 0.8x sales

StatPro is acquiring UBS Delta, a portfolio analysis and risk management system, from UBS for €13.05m. The acquisition significantly scales up StatPro’s business, boosting FY18 revenues by c 33% and EBITDA by c 40%. While the deal looks very cheap at less than 0.8x revenues, compared with 7.3x sales that FactSet recently paid for BISAM, a key competitor of StatPro, UBS Delta’s technology needs to be refreshed and to achieve this, its functionality, along with the customer base, will be transitioned to StatPro Revolution. If StatPro can successfully integrate UBS Delta, we believe there is strong upside potential in the shares, given the significant valuation disparity with its US-listed financial software peers.

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