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Numis Corporation — Update 10 December 2015

Numis Corporation (LSE: NUM)

Last close As at 20/12/2024

GBP3.43

— 0.00 (0.00%)

Market capitalisation

GBP402m

More on this equity

Research: Financials

Numis Corporation — Update 10 December 2015

Numis Corporation

Analyst avatar placeholder

Written by

Financials

Numis Corporation

Growth in franchise continues

FY15 results

Financial services

10 December 2015

Price

268p

Market cap

£303m

Net cash (£m) at September 2015

59.6

Shares in issue

113.1m

Free float

58.5%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.4

15.5

7.2

Rel (local)

13.9

17.1

11.1

52-week high/low

276.3p

202.0p

Business description

Numis has grown to become one of the UK's leading institutional stockbrokers and corporate advisors. It employs c 210 staff, and has 183 corporate clients. In 2015 it was involved in 39 corporate deals.

Next event

AGM

Early February 2016

Analysts

Mark Thomas

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5745

Numis has reported a strong set of numbers with an increasing client base, higher revenue and profits above expectations. The company has made a good start to this year with 12 capital raising transactions, including six IPOs (FY15 38 and 11 respectively). The key issue for sustainable growth in a stockbroking and corporate advisory business like Numis is its client base. The number of clients rose to 183 from 171 and they have been increasingly active.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

92.9

30.5

22.0

10.5

12.2

3.9

09/15

98.0

32.7

23.5

11.5

11.4

4.3

09/16e

102.5

34.3

23.8

12.0

11.3

4.5

09/17e

105.8

36.5

25.2

12.5

10.6

4.7

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

2015 results

Compared with our initiation estimates in November, revenue beat expectations by £1.5m, costs were £2m better than expected and statutory profits c £1.5m better (despite a £2m loss on investments due to market price volatility). There was strong growth across the business, with deal-related income at £55.6m compared with £45.5m in FY14. Trading revenue fell to £4.1m (FY14 £7.7m), but we note that H215 performance (£3.1m) reflected a reversion to more normal levels and was an improvement on an unusually weak H115 (£1.0m).Corporate retainers rose to £8.9m (from £7.8m). Commissions were £29.3m vs £31.9m, in part reflecting the anticipated effect of regulatory proposals on unbundling research affecting current pricing discussions. The number of corporate clients rose to 183. Net cash was £59.6m at end 2015, down from £74.5m, affected by funding trading investments and a near £4m office refurbishment.

Outlook

As noted above the company has made an active start to FY16, already having completed half the IPOs seen in FY15. The multi-year gains in corporate clients together with their increasing average market capitalisations should provide a good base for further growth. However, market conditions remain volatile and we have therefore not changed our FY16e numbers materially.

Valuation: Around fair value

We have rolled forward the base year of our valuation metrics by one year – the primary driver to increasing our average valuation to 258p (from 239p). The expected higher profits and so dividend in FY17e sees our DCF model increase to 233p (from 217p). The extra years' retentions see a higher forecast NAV driving up our Gordon’s model to 284p from 261p. There is upside from further franchise growth. We note our cost of equity is above management's view and our Gordon's growth model is sensitive to this assumption.

Unbundling of commissions

We believe the biggest issue facing the broking side of the business is the unbundling of research commissions from execution commissions (see our initiation note). Numis has had a number of discussions with its institutional clients and believes that, compared with the market as a whole, greater value will be given to execution services, providing some mitigation against this regulatory risk. In addition, we note that the proposed changes appear to experiencing a degree of reassessment and they will not be formally implemented for some years (effective from January 2017 at the earliest). However, they are already having an impact on market pricing (a trend supported by anecdotal experience at other firms). We note Numis’s comment that “institutional commissions earned from execution and research services held up well against a background of challenging regulatory proposals supporting the unbundling of research and execution commissions”. With some of the impact already being felt, we do not believe that Numis faces commissions “dropping off a cliff” when the regulations are finally applied. In our forecasts we have flat commissions over the next two years, with this pressure offsetting the benefit of franchise growth as well as any market appreciation.

Other operating income

We note a £2m other operating loss in 2015. We understand that this primarily relates to mark-to-market moves on quoted investments. On occasion, Numis will take an equity position in companies it floats and the realisation of these investments depends on a range of factors including risk concentrations and market performance. As Numis is cash-rich, it is under no pressure to sell such investments. We understand the position creating the 2015 loss is longstanding and had contributed significantly in the past, when the group has reported positive other income (2012 £2.8m, 2013 £3.6m). The number of such investments is small and the 2015 negative income was less than 10% of group profit.

Cash for strategic investments

In 2015 Numis made three notable investments:

■

£10m seed funding in FP Numis Mid Cap Fund in July 2015. The investment objective of this fund is to produce a total return in excess of the Numis Mid Cap Index over the medium term, typically a three-year rolling period. As it is unlikely that material third-party money will follow until the fund performance shows a suitable track record, Numis has provided seed funding. The returns from this investment are likely to be driven by similar factors as Numis as a whole, therefore this investment does not create a materially different risk exposure;

■

£4m in fixed asset expenditure to refurbish the office space in London. In addition, there have been one-off costs associated with the disruption from this refurbishment (eg hiring external meeting rooms) and our forecast is for a reduction of £2m in non-compensation expenditure FY16 on FY15; and

■

£4m on taking an 8.5% stake in the crowdfunding platform Crowdcube in July 2015.

As a consequence of these investments and an increase in dividends paid in cash following the cessation of a scrip alternative (to £12m from £8m), the group’s net cash fell by £15m to £60m in FY15.

Changes in estimates

While FY15 was ahead of our estimates, the changes carried forward at this stage of the year are modest. We will review our numbers later in the year when the effect of variable market confidence is more clear. We have introduced FY17 estimates assuming a modest revenue growth (3%) and small operational leverage (cost income ratios improving by 1pp).

Exhibit 1: Changes to forecasts

Revenue (£m)

Adj pre-tax profit (£m)

EPS (p)

DPS (p)

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

FY15

96.5

98.0

2

30.8

32.7

6

21.6

23.5

9

11.0

11.5

5

FY16e

101.5

102.5

1

33.1

34.3

4

23.2

23.8

2

12.0

12.0

0

FY17e

N/A

105.8

N/A

N/A

36.5

N/A

N/A

25.2

N/A

N/A

12.5

N/A

Source: Edison Investment Research.

Valuation

Our valuation approaches (DDM and Gordon’s growth) indicate an average fair value of 258p (previously 239p), ie around the current price. The driver to the change is rolling forward our base valuation by one year (thus including higher levels of profit and equity) as well as a small benefit from 2015 outperformance. The key upside will come from above forecast growth driven by either market share gains from the quality client base or above expected market appreciation. We note that our cost of equity is above management's view.

Gordon’s growth model 284p (previously 261p)

Exhibit 2: Gordon’s growth model

 

Base

+1% ROE

+2% ROE

-1% COE

-2% COE

+1% growth

+2% growth

Return on equity (%)

20.00

21.00

22.00

20.00

20.00

20.00

20.00

Cost of Equity (%)

10.75

10.75

10.75

9.75

8.75

10.75

10.75

Growth (%)

5.00

5.00

5.00

5.00

5.00

6.00

7.00

P/BV (x)

2.61

2.78

2.96

3.16

4.00

2.95

3.47

BVps 2017 (P)

112.3

112.3

112.3

112.3

112.3

112.3

112.3

Less one off capital repatriation

-26.5

-26.5

-26.5

-26.5

-26.5

-26.5

-26.5

BVPS 2017 (p)

85.8

85.8

85.8

85.8

85.8

85.8

85.8

Implied value (p)

223.8

238.8

253.7

271.0

343.2

252.9

297.5

Near term performance discount/ premium

15%

15%

15%

15%

15%

15%

15%

Implied value (p)

257.4

274.6

291.7

311.6

394.7

290.8

342.1

Plus one off

26.5

26.5

26.5

26.5

26.5

26.5

26.5

Total value

283.9

301.1

318.2

338.1

421.2

317.3

368.6

Variance from base (p)

 

17.2

34.3

54.2

137.3

33.4

84.7

Source: Edison Investment Research

As an advice-rich and regulatory capital-light business, Numis should have a sustainable return on equity well above its cost of capital. Accordingly, we have assumed a 20% sustainable return and a cost of equity of 10.75% and growth of 5%. The COE reflects the expected 2015 dividend paid relative to closing equity and is what investors actually receive from the company. Management's view is that this may be over-conservative and we note a cost of equity of 8.75% would imply a valuation of 421p. Our 2015/16 estimated ROE is c 25% and equity growth 8% and 9%, respectively. With near-term performance ahead of long-term assumptions, we build in a 15% premium to reflect outperformance. We also make an adjustment assuming a one-off distribution of £30m reflecting the group’s surplus capital (this actually reduces the valuation as it is valued at par rather than 2.61x book).

Dividend discount model 233p (previously 217p)

We use our explicit forecasts of dividends for 2016-17 (12p and 12.5p respectively). For 2018, the base of our longer-term assumptions, we take the 2017 normalised diluted EPS (25p), increase it by 5% and assume a two-thirds pay-out, ie a dividend of 17.5p. We then increase the dividend number by 5% pa for a further nine years and apply a 10x multiple for terminal value. All payments are subject to a 10.75% discount rate (cost of equity). We have also included a one-off capital distribution of £30m (26.5p/share) to reflect surplus capital in the group. On these assumptions, the fair value is 233p, of which 33% is attributable to the terminal value. This valuation would be c 270p on an 8.75% cost of equity.

Peer comparisons

Exhibit 3: Key peer comparisons

 

Price (p)

Market cap (£m)

2014 P/E (x)

2014 yield (%)

Numis (Sept)

268

303

12.2

3.9

Arden Partners (Oct)

37.5

8

41.6

1.7

Cenkos Securities

165

94

4.7

10.2

Panmure Gordon

87.5

13

9.1

1.9

Shore Capital

425

103

19.0

2.4

Source: Company reports, Thomson, Edison Investment Research. Note: *Edison full-year forecast. Prices at 9 December 2015.

The publicly available forecasts for brokers are limited, so we have included historic measures.

Exhibit 4: Financial summary (£000s)

2010

2011

2012

2013

2014

2015

2016e

2017e

Year-end 30 September

PROFIT & LOSS

Revenue

 

 

51,940

54,203

50,076

77,658

92,862

97,985

102,500

105,775

Cost of Sales (excl. amortisation and depreciation)

(44,118)

(45,437)

(42,179)

(52,723)

(62,427)

(64,456)

(67,246)

(68,396)

Share based payment (and associated NI) *

(7,740)

(7,170)

(6,324)

(5,968)

(6,130)

(4,666)

(5,143)

(5,243)

EBITDA

 

 

82

1,596

1,573

18,967

24,305

28,863

30,111

32,136

Depreciation

 

 

(511)

(391)

(373)

(397)

(384)

(882)

(1,000)

(1,000)

Amortisation

(104)

(75)

(49)

(62)

(77)

(111)

(111)

(111)

Op. profit (incl. share-based payouts pre-except.)

(533)

1,130

1,151

18,508

23,844

27,870

29,000

31,025

Net finance income

649

570

181

561

477

190

190

190

Non-recurring items

0

(2,208)

0

0

0

0

0

0

Investment revenues *

59

688

2,817

3,550

49

(1,978)

64

64

Profit before tax (FRS 3)

 

 

175

180

4,149

22,619

24,370

26,082

29,254

31,279

Profit before tax (norm)

 

 

7,856

8,870

7,656

25,037

30,451

32,726

34,333

36,458

Tax

(276)

(851)

(848)

(4,555)

(4,311)

(4,533)

(5,851)

(6,256)

Profit after tax (FRS 3)

 

 

(101)

(671)

3,301

18,064

20,059

21,549

23,403

25,023

Profit after tax (norm)

 

 

6,826

7,397

6,704

20,588

25,761

27,628

28,178

29,891

Average diluted number of shares outstanding (m)

110.8

109.3

111.6

115.6

117.2

117.6

118.5

118.5

EPS – diluted normalised (p)

 

 

6.16

6.77

6.01

17.80

21.98

23.49

23.78

25.22

EPS – diluted FRS3 (p)

 

 

(0.09)

(0.61)

2.96

15.62

17.11

18.32

19.75

21.12

Dividend per share (p)

8.00

8.00

8.00

9.00

10.50

11.50

12.00

12.50

EBITDA margin (%)

0.2%

2.9%

3.1%

24.4%

26.2%

29.5%

29.4%

30.4%

Operat margin (before GW and except.) (%)

(1.0%)

2.1%

2.3%

23.8%

25.7%

28.4%

28.3%

29.3%

BALANCE SHEET

Fixed assets

 

 

5,254

4,233

3,947

4,491

4,337

6,724

6,224

5,974

Current assets

 

 

333,196

296,244

320,505

306,870

425,910

279,114

288,120

297,350

Total assets

 

 

338,450

300,477

324,452

311,361

430,247

285,838

294,344

303,324

Current liabilities

 

 

(231,391)

(200,886)

(227,377)

(204,534)

(320,170)

(170,319)

(170,319)

(170,319)

Long term liabilities

(349)

0

0

0

0

0

0

0

Net assets

 

 

106,710

99,591

97,075

106,827

110,077

115,519

124,025

133,005

CASH FLOW

Operating cash flow

 

 

2,863

(659)

4,118

44,891

21,164

6,467

30,145

30,952

Net cash from investing activities

466

301

(107)

177

323

(3,632)

(284)

(284)

Net cash from (used in) financing

(21,991)

(13,345)

(9,810)

(9,763)

(17,958)

(17,510)

(20,855)

(21,438)

Net cash flow

 

 

(18,662)

(13,703)

(5,799)

35,305

3,529

(14,675)

9,006

9,230

Opening cash

 

 

74,266

55,370

41,778

35,854

71,205

74,518

59,591

68,597

Fx effect

 

 

(234)

111

(125)

46

(216)

(252)

0

0

Closing net cash

 

 

55,370

41,778

35,854

71,205

74,518

59,591

68,597

77,827

Source: Numis accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Numis Corporation 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. 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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

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245 Park Avenue, 39th Floor

10167, New York

US

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Level 25, Aurora Place

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NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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