Numis Corporation — Tough times but a positive start to FY20

Numis Corporation (LSE: NUM)

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Research: Financials

Numis Corporation — Tough times but a positive start to FY20

Numis has continued to build its franchise against a difficult market background, with net additions to its corporate client roster during FY19 and market share gains within its equities business. Lack of corporate activity meant the return on equity was reduced to 7% last year but, on a medium-term view, there are good prospects for a substantial improvement, with a return to the five-year average of 18% not an unreasonable aspiration.

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Financials

Numis Corporation

Tough times but a positive start to FY20

FY19 results and outlook

Financial services

11 December 2019

Price

259p

Market cap

£272m

Net cash (£m) at end September 2019

84.2

Shares in issue

106.5m

Free float

75%

Code

NUM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

17.0

12.6

1.3

Rel (local)

18.5

12.2

(7.1)

52-week high/low

280p

212p

Business description

Numis is one of the UK's leading independent investment banking groups, offering a full range of research, execution, equity capital markets, corporate broking and advisory services. It employs c 270 staff in offices in London and New York, and at the end of September 2019 had 217 corporate clients.

Next events

AGM trading update

February 2020

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Numis Corporation is a research client of Edison Investment Research Limited

Numis has continued to build its franchise against a difficult market background, with net additions to its corporate client roster during FY19 and market share gains within its equities business. Lack of corporate activity meant the return on equity was reduced to 7% last year but, on a medium-term view, there are good prospects for a substantial improvement, with a return to the five-year average of 18% not an unreasonable aspiration.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

130.1

38.3

25.9

12.0

10.0

4.6

09/18

136.0

31.6

23.0

12.0

11.2

4.6

09/19

111.6

12.4

8.1

12.0

31.9

4.6

09/20e

125.5

21.1

15.1

12.0

17.1

4.6

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

FY19 results mainly in line

Revenues were down 18% on the prior year, in line with the indication given in the year-end trading update. Costs were controlled, with staff costs down 14% and total administrative costs 8% lower. Even so, PBT was down 61% to £12.4m, reflecting operational gearing and the impact of valuation write-downs in the investment portfolio (£2.2m), the main variation from our estimate. Diluted EPS were 65% lower at 8.1p and the full year dividend was maintained at 12p. The balance sheet remains strong with no debt and cash of £84.2m (FY18: £111.7m). Numis continued to add to its corporate client portfolio (a net increase of seven to 217), with new additions having a higher average market cap than departures. It notes that it has made market share gains in equities and that research payments have been resilient against a tough background.

Background difficult, but good start to FY20

While the background remains difficult with political uncertainty damping corporate activity, the first two months of the fiscal year have seen an encouraging start with revenues across the business ahead of the same period last year. There have been fund-raisings for Bovis Homes and Future, an advisory mandate on a £1.5bn M&A transaction and a significant (unnamed) private transaction. Numis remains a prime potential beneficiary of greater political certainty in the UK and a revival of confidence among its corporate and institutional client base.

Valuation reflects only part of the recovery potential

The prospective P/E multiple of over 17x and implied market ROE assumption of over 15% (see page 9) appear high at first sight, but arguably only discount part of the recovery and longer-term growth potential for Numis.

Keeping a focus on longer-term growth

Formation and development

Founded in the late 1980s by former CEO Oliver Hemsley, Numis was listed on AIM in 1996. It has grown to become a leading UK corporate advisory and stockbroking business and has set its vision as becoming ‘the investment bank of a generation’. The current co-CEOs, Alex Ham and Ross Mitchinson, joined the company in 2005 and 2008 respectively and assumed their roles in September 2016. Oliver Hemsley stepped down from the board and all executive responsibilities in May 2017.

A growing franchise

Numis has achieved a steady increase in the number of corporate clients with an accompanying increase in their average market capital: at the end of FY19 there were 217 clients with an average market cap of £888m (Exhibit 1). While the average size has increased and it now numbers seven FTSE 100 and 47 FTSE 250 companies among its clients, Numis has not given up its traditional strength in small-cap and mid-cap broking. The group has ranked number one in the Extel survey for UK small- and mid-caps for seven years. The strength of the research and sales team has also been evidenced by retention of the institutional client base and broad maintenance of research revenues following the implementation of MiFID II and the increased downward pressure on institutional research budgets that has accompanied this.

Revenue CAGR of 14% since FY12 despite difficult FY19

The evolution of revenues since FY12 is shown in Exhibit 2, with the growth in corporate client numbers feeding through to significant revenue growth until FY18. Even after the market-induced slowdown seen in FY19, compound annual growth in retainer, advisory and capital markets fees (investment banking segment) over the period shown was 20%. Last year capital markets fees alone accounted for 43% of total revenue, bolstered by a contribution of about eight percentage points from private transactions, a newer area of development for the group. Institutional commissions accounted for 30% of the total, while compound growth here has been limited to 8% by persistent pressure on commission rates and subdued market activity during FY19. As would be expected, trading has seen fluctuations in income but has contributed positively in each year, with the reduction in income seen last year largely arising from a one-off loss.

Exhibit 1: Corporate client numbers and market caps

Exhibit 2: Revenue progression (year to 30 September)

Source: Numis, Edison Investment Research

Source: Numis, Edison Investment Research

Exhibit 1: Corporate client numbers and market caps

Source: Numis, Edison Investment Research

Exhibit 2: Revenue progression (year to 30 September)

Source: Numis, Edison Investment Research

The largest element of cost for the business is staff remuneration and for most of the period since 2012 the compensation ratio has remained close to the average value of 54%. Even though it rose in the more difficult years (FY12 and FY19), flexibility provided by the variable element of compensation contained the increase and limited the impact of lower revenues on the overall cost/income ratio. As a result of this discipline, an operating profit margin of between 22% and 29% was maintained for FY13–18, while in FY12 and FY19, when revenues were depressed, the margin was 7.5% and 10.6% respectively.

Exhibit 3: Cost ratios

Exhibit 4: Average headcount and revenue per head

Source: Numis, Edison Investment Research

Source: Numis, Edison Investment Research

Exhibit 3: Cost ratios

Source: Numis, Edison Investment Research

Exhibit 4: Average headcount and revenue per head

Source: Numis, Edison Investment Research

The group undertook significant investment in staff recruitment during FY18 to support service levels to existing clients and further growth in the business. Additions were made in both the investment banking and equities businesses and the period-end headcount increased by 16% to 277. As shown in Exhibit 4, this contributed to marked growth in the average headcount in both FY18 and FY19, resulting in lower revenue per head, particularly in FY19 given the market-related reversal in revenues.

Looking through the near-term fluctuation in revenues and reflecting the group’s longer-term ambition, Numis remains committed to its strategy for achieving growth in the franchise by implementing the steps outlined below.

Steps to deliver the vision

In order to achieve the group’s overall vision of becoming the investment bank of a generation, management has identified five strategic pillars which, if successfully executed, should secure sustainable growth (subject to market cycles), profitability and attractive shareholder returns

1.

Build the size and quality of the corporate franchise. The aim here is to build further on the group’s development to date. Numis focuses on the quality of clients and aspires to attract corporates across a range of market capitalisations, and to provide a natural home for interesting and ambitious small caps.

2.

Become the leading UK equities platform. Numis is seeking to gain market share in UK equities and equity capital markets activity, and to maintain its number one Extel ranking.

3.

Develop complementary products and services. Under this heading the company looks to increase its advisory revenues, develop a position as a leader in private markets and, over time, generate significant revenues from new areas.

4.

Maintain operating and capital discipline. Additions to staff during FY18 and the prospective move to a new headquarters office expected in H221 have and will increase costs, but these measures are intended to support service provision to clients and to facilitate the longer-term development of the business.

5.

Deliver shareholder returns. The first four pillars are intended to result in the generation of revenue growth and a more stable margin and attractive return for shareholders over the cycle. The group’s commitment to the use of share buybacks to offset share issuance for staff compensation and to return excess cash should also contribute positively to returns and the level of earnings per share.

FY19 results

The revenue decline of 18% for FY19 versus FY18 was in line with the group’s indication in its year-end trading update. On the other income line there was a £3.9m swing from profit to loss arising from valuation write-downs in the investment portfolio and as a result total income was 21% lower. Costs fell by 8% driven by a 14% reduction in staff costs, which in turn reflected lower variable compensation. This left pre-tax profits down by 61% and EPS 65% lower after a higher effective tax rate of 25% versus 16%. Exhibit 5 provides a summary of the figures including the revenue analysis with additional comments noted below. Figures are compared with FY18 unless stated.

Exhibit 5: Five-year profit and loss analysis

£m unless stated

FY15

FY16

FY17

FY18

FY19

Change FY19/FY18

Net trading gains

4.1

6.5

9.0

9.6

4.0

-58.2%

Institutional income

29.3

31.9

35.8

37.9

33.3

-12.0%

Equities

33.4

38.4

44.8

47.5

37.3

-21.4%

Corporate retainers

8.9

9.6

11.6

12.4

13.4

7.5%

Advisory fees

17.9

16.3

14.4

17.3

12.6

-27.5%

Capital markets

37.7

48.0

59.4

58.8

48.4

-17.8%

Investment banking

64.6

73.9

85.3

88.6

74.3

-16.1%

Total revenue

98.0

112.3

130.1

136.0

111.6

-18.0%

Other operating income

(2.0)

3.8

3.4

1.7

(2.2)

-227.5%

Total income

96.0

116.1

133.5

137.8

109.4

-20.6%

Staff costs

(47.4)

(58.9)

(69.0)

(75.3)

(64.5)

-14.3%

Non-staff costs

(22.7)

(24.7)

(26.4)

(31.0)

(33.0)

6.3%

Total administrative expenses

(70.1)

(83.6)

(95.4)

(106.3)

(97.5)

-8.3%

Operating profit / loss

25.9

32.5

38.1

31.4

11.9

-62.2%

Finance income/expense

0.2

0.0

0.2

0.2

0.6

159.4%

Pre-tax profit

26.1

32.5

38.3

31.6

12.4

-60.7%

Tax

(4.5)

(6.1)

(7.9)

(5.0)

(3.1)

-37.4%

Effective tax rate

17.4%

18.8%

20.7%

15.7%

25.0%

59.3%

Attributable profit

21.5

26.4

30.4

26.7

9.3

-65.0%

Diluted EPS (p)

18.3

22.4

25.9

23.0

8.1

-64.7%

Dividend (p)

12.0

12.0

12.0

12.0

12.0

0.0%

Source: Numis, Edison Investment Research

Equities revenue was down 21% with £5.6m of the £10.1m decline arising in trading income, where the main driver was a loss associated with the underwriting of the Kier rights issue in the first half. Institutional income was affected by lower activity levels but, positively, the company reported that UK equities market share increased and research payments were stable in the face of continued downward pressure on institutional research budgets following the implementation of MiFID II (January 2018).

Investment banking saw a 16% reduction in overall revenues, with capital markets down 18% reflecting lower market activity (see background comments below). The decline here would have been substantially greater but for the contribution of c £9m from private transactions including a $460m fund-raising for Klarna (Swedish fintech business). Numis has been developing this area for several years but a refocus on later-stage transactions appears to have paid off handsomely. Advisory income (-28%) was affected by the lower incidence of M&A activity involving Numis clients, another symptom of the uncertain political backdrop.

The £2.2m negative item (other operating income) relating to the investment portfolio arose from valuation write-downs prompted by estimate revisions or, in one case, a fund-raising at a lower value. The portfolio value at the year-end was £14.9m and comprises strategic investments in a range of mainly early-stage unquoted investments, where Numis believes it can use its network to help develop the businesses.

The full year dividend was unchanged at 12p/share. The group aims to pay a stable dividend while remaining committed to returning excess cash to shareholders and mitigating the dilutive impact of share awards; during the year £12m (£16.3m) was spent on buying back shares.

Background and outlook

The charts below set the scene by showing the trends in money raised (new and further) on the main and AIM markets of the London Stock Exchange since 2010; the figures for 2019 are up to the end of November. The number of new issues and value of total issuance for the 11 months to end November 2019 versus the prior year period were down 41% and 15% respectively on the main market, with steeper declines of 76% and 40% for AIM. For the period of Numis’s financial year, the trends for AIM were broadly similar but the main market saw a modest increase in value of total issuance (+7%), while the number of new issues was down 12% reflecting a more concentrated market opportunity.

Exhibit 6: LSE main market issuance and IPO count

Exhibit 7: LSE AIM issuance and new issue count

Source: London Stock Exchange. Note: 2019 to end November

Source: London Stock Exchange. Note: 2019 to end November

Exhibit 6: LSE main market issuance and IPO count

Source: London Stock Exchange. Note: 2019 to end November

Exhibit 7: LSE AIM issuance and new issue count

Source: London Stock Exchange. Note: 2019 to end November

Next we look at recent equity market performance and trading volumes. The table below shows the performance of the FTSE All-Share, SmallCap and AIM All-Share indices for Numis’s FY19 and FY20 ytd periods. For FY19, the main feature is the much greater weakness shown in the AIM index perhaps reflecting concerns over the domestic outlook combined with repercussions of the collapse of Woodford IM and related liquidity concerns. In the period since end September, the movements are small but the small-cap and AIM indices are ahead and the All-Share down, perhaps a reflection of changing political expectations ahead of the UK general election and the strengthening of sterling that has accompanied this.

Exhibit 8: Equity indices recent performance

FTSE All-Share

FTSE Small cap

FTSE AIM All-Share

FY19

-2%

-6%

-21%

FY20 ytd

-2%

2%

4%

From five-year high

-8%

-8%

-18%

Source: Refinitiv as at 4 December 2019

Exhibit 9 charts the performance of the three indices since end 2017, underlining the divergence of the AIM index since the end of 2018. This weakness will have played into the weakness in issuance activity on AIM, while the heightened level of political and economic uncertainty prevailing since the EU referendum has contributed to reduced activity in both the main and AIM markets.

On this point, Exhibit 10 shows that trading activity has also weakened with the average daily value traded on the London Stock Exchange order book down 19% for Numis FY19 compared with the prior year.

Exhibit 9: FTSE AIM, All-Share and SmallCap indices

Exhibit 10: LSE order book, average daily value traded

Source: Refinitiv. Note: Total return indices.

Source: London Stock Exchange (Main Market)

Exhibit 9: FTSE AIM, All-Share and SmallCap indices

Source: Refinitiv. Note: Total return indices.

Exhibit 10: LSE order book, average daily value traded

Source: London Stock Exchange (Main Market)

Our next two charts show the trend in UK mergers and acquisitions since 2015 and in more detail since the beginning of 2018. These confirm the commentary from Numis and other market participants. By value, the 2019 quarterly run rate (to Q3) is 44% below the 2015–18 average and 39% lower than 2018. By number, 2019 is 8% down on 2018.

Exhibit 11: UK M&A transaction value 2015–19

Exhibit 12: UK M&A value and volume 2018 and 9M19

Source: ONS. Note: Total of inbound, outbound and domestic.

Source: ONS, Edison Investment Research

Exhibit 11: UK M&A transaction value 2015–19

Source: ONS. Note: Total of inbound, outbound and domestic.

Exhibit 12: UK M&A value and volume 2018 and 9M19

Source: ONS, Edison Investment Research

Looking ahead, there is potential for a bounce back in corporate activity in terms of both issuance and M&A if there is an increase in investor and corporate confidence in the post-election period. UK brokers have generally reported a healthy pipeline of potential transactions but uncertainty of execution given the uncertainty of political developments.

In its own outlook comments, Numis indicated that for the first two months of FY20 revenue across the group was ahead of the same period last year. This is an encouraging start given that the prior year period was not a soft comparison. In particular, Numis cites fund-raisings for Bovis Homes (£152m) and Future (£104m), an advisory role to Unite in its £1.4bn acquisition of Liberty Living and a significant (unnamed) private fintech transaction. Materially higher equities revenue in the period included strong trading gains and improved execution commissions.

Numis notes that its pipeline of private markets opportunities has continued to grow and, following a strong outcome in FY19, this could again make a material contribution to capital markets revenue. Similarly, the company maintains its strategic focus on developing M&A advisory business and mentions an increase in activity in recent months, which could play into a pick-up in transactions following the downturn last year.

While the timing and degree of a recovery in market activity remains in doubt, Numis’s investment in and strategic emphasis on continuing development of its franchise should mean it is well positioned to generate attractive returns on equity and cash flows to support returns to shareholders through dividends and share buybacks.

In the next section, we discuss our new estimates for FY20 and scenario analysis to give an indication of the potential sensitivity of the outcome to different revenue assumptions.

Financials

A comparison of headline figures for FY19 versus our estimates is shown in Exhibit 13 together with the FY20 estimated figures introduced with this note. The main difference between our FY19 estimate and the outcome was the £2.2m negative item in other income arising from portfolio write-downs, as discussed earlier.

Exhibit 13: FY19 actual versus estimate and FY20 estimate introduced

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

09/19

111.6

111.6

0.0%

13.8

12.4

-9.6%

9.6

8.1

-15.8%

12.0

12.0

0.0%

09/20e

125.5

21.1

15.1

12.0

Source: Edison Investment Research. Note: FY19 old = Edison Investment Research estimate.

A segmental analysis of revenues shows the assumptions we have made for FY20 compared with the two prior years. Points to note here include the marked improvement assumed for net trading gains (no repetition of the Kier rights issue loss) and advisory fees (good start to year and continuing focus in this area). The increase assumed for capital markets is more muted, although still significant in absolute terms. This reflects an expectation of some increase in activity but a level of political and economic uncertainty continuing that may moderate the degree of recovery. Within equities Numis has announced that it expects to launch an electronic trading product that will address the growing use of such low-touch platforms. We have assumed that this will not have a significant effect on figures for FY20.

Exhibit 14: Analysis of revenue estimate

£000

2018

2019

2020e

Change

Net trading gains

9,594

4,008

7,000

75%

Institutional income

37,866

33,317

35,000

5%

Equities

47,460

37,325

42,000

13%

Corporate retainers

12,430

13,357

14,025

5%

Advisory fees

17,335

12,576

17,500

39%

Capital markets

58,822

48,352

52,000

8%

Investment banking

88,587

74,285

83,525

12%

Total revenue

136,047

111,610

125,525

12%

Source: Edison Investment Research

On non-staff costs we have allowed for a modest underlying increase but added approaching £2m for potential one-off costs associated with the move to a new London office with the lease beginning near the end of FY20 and relocation expected to take place in H221. This takes non-staff costs from £31.8m to an estimated £34.5m. 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 recent 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). For staff costs we have allowed for limited change in fixed costs and assumed variable compensation is equivalent to c 20% of pre-bonus profit.

Given the considerable uncertainty over revenue levels at this early stage in Numis’s financial year we have prepared an estimated sensitivity analysis to show some possible outcomes at different revenue levels. Note that for the other operating income line we have assumed a neutral position (no positive or negative impact from the investment portfolio). Non-staff costs are held flat across the scenarios and include the estimated one-off move-related costs mentioned above. These would drop out in FY21 but there will be additional ongoing costs following the move that would give rise to some incremental cost despite this (we estimate £1–2m). Staff costs are flexed to reflect movements in pre-bonus profitability with fixed costs unchanged between the scenarios. As shown, net profit varies between £7.8m and £20.7m on our assumptions.

Exhibit 15: Illustrative scenario analysis around 2020 estimate

£m unless stated

Low

Mid

High

Revenue

108.9

125.5

134.0

Other operating income (investment portfolio)

0.0

0.0

0.0

Total income

108.9

125.5

134.0

Non staff costs

(35.6)

(35.6)

(35.6)

Staff costs

(64.2)

(69.3)

(73.4)

Operating profit

9.1

20.6

25.0

Net finance income

0.6

0.6

0.6

Pre-tax profit

9.7

21.1

25.5

Tax

(1.8)

(4.0)

(4.9)

Net profit

7.8

17.1

20.7

EPS (p)

6.9

15.1

18.3

DPS (p)

12.0

12.0

12.0

Return on equity

6%

12%

15%

Total cost/revenue

92%

84%

81%

Total staff cost/revenue

59%

55%

55%

Variable staff cost % of pre-bonus profit

12%

20%

25%

Source: Edison Investment Research

Numis remains financially strong with no debt and year-end cash and cash equivalents on the balance sheet of £84.2m (FY18: £111.7m; H119: £78.9m). The cash reduction during FY19 mainly reflected the £19m reduction in pre-tax profit compared with FY18 and a working capital outflow of £24m (versus the prior year inflow of £12m). For reference, the average working capital movement over the last five years has been an outflow of £3.4m. Liquidity has been enhanced through the arrangement of a revolving credit facility of £35m committed for three years; this provides additional headroom in the event that activity levels pick up in that period. While the level of net assets was 3.5% lower at £138.2m (which we calculate would give qualifying capital of £131.2m) this still leaves substantial headroom above the regulatory requirement with cover indicated to be c 2x.

Valuation

Our updated comparative valuation table (Exhibit 16) includes UK quoted brokers and a selection of US and European investment banks and advisory firms. A comparison of P/Es for the UK players is hampered by the negative impact of the uncertain political background, the availability of consensus forecast earnings and different financial year ends. Compared with the US and European companies, Numis trades on a higher P/E, which is understandable at a time when its earnings are likely to be more depressed than some of these peers.

Its price to book multiple is higher than its UK comparators but in line with the international peer group despite a lower ROE, which again can be understood on the basis that earnings are relatively depressed and should revert to a higher level in due course.

Exhibit 16: Peer comparison

Price
(local)

Market cap
(£m)

Last reported
P/E (x)

Current P/E
(x)

Yield
(%)

ROE
(%)

Price to book
(x)

Last reported year-end

UK brokers

Numis

264

277

32.5

18.3

4.5

6.6

2.0

Sep-19

Arden

18

5

Loss

N/A

0.0

N/A

0.6

Oct-18

Cenkos

42

24

10.0

40.2

9.5

8.0

0.8

Dec-18

FinnCap

22

37

11.8

15.8

6.4

10.2

1.7

Mar-19

WH Ireland

49

24

Loss

N/A

0.0

N/A

1.4

Mar-19

UK brokers average

18.1

24.7

4.1

8.3

1.3

US, European IB and advisory

Bank of America

33.5

301,426

12.8

12.3

1.6

10.5

1.2

Dec-18

Evercore

75.7

3,447

8.4

9.6

2.5

69.7

4.0

Dec-18

Goldman Sachs

221.8

78,540

8.8

10.1

1.4

12.3

1.1

Dec-18

Greenhill

16.7

318

N/A

N/A

1.2

29.7

5.5

Dec-18

JP Morgan

134.4

421,575

14.9

12.9

1.8

13.0

1.7

Dec-18

Moelis

34.2

2,043

11.4

14.4

5.5

60.4

4.7

Dec-18

Morgan Stanley

49.6

80,282

10.5

10.0

2.2

11.8

1.2

Dec-18

Stifel Financial

61.7

4,221

11.7

10.6

0.8

14.2

1.4

Dec-18

Credit Suisse

13.0

33,215

12.1

10.7

2.0

7.8

0.8

Dec-18

Deutsche Bank

6.5

13,511

15.0

Loss

1.7

N/A

0.2

Dec-18

UBS

12.1

46,602

9.3

10.1

5.8

9.5

0.9

Dec-18

US, European IB and advisory average

11.5

11.2

2.4

23.9

2.1

Source: Refinitiv. Note: Priced at 9 December 2019. P/Es are for financial years therefore not all same period end.

Exhibit 17 charts the history of the price to book ratio over the last 10 years showing how this has recently been oscillating round its average value and is currently almost exactly in line with this level. This again can be justified on the basis that, with continued growth in the client base, profitability is likely to improve significantly when corporate confidence returns.

Exhibit 17: Ten-year history of the price to book value ratio for Numis

Source: Refinitiv, Edison Investment Research

As in previous notes, we have used an ROE/COE valuation model to infer the ROE assumption required to match the 259p share price at time of writing: this gives a value of 15.8% (based on the FY19 NAV of 132p and assuming a cost of equity of 10% and growth of 4%). Our current forecast indicates an ROE of 12% for FY20 but on a medium-term view, with a return to more favourable market conditions and as benefits from the investment in staff made in FY18 are realised, a return in line with or above the five-year historical average of 18% does not appear an unrealistic outcome in subsequent years. The sensitivity of the valuation to changing growth and ROE assumptions is illustrated in Exhibit 18.

Exhibit 18: ROE/COE valuation output variations (value per share, p)

Growth rate (right)

Return on equity

2.0%

3.0%

4.0%

5.0%

6.0%

10.0%

132

132

132

132

132

12.0%

165

169

176

184

198

15.0%

214

226

242

263

296

18.0%

263

282

307

343

395

20.0%

296

320

351

395

461

Source: Edison Investment Research

Finally we include a table summarising the recent share price performance of the peer group stocks. Most of the UK stocks have experienced significant negative moves year-to-date reflecting the difficult market background, while on average the US and European stocks have recorded gains. Numis shares have performed noticeably better than the UK peers perhaps reflecting the evidence of franchise strength discussed earlier in the note and the perception that its UK corporate client base would benefit from a resolution of at least part of the political uncertainty following the election.

Exhibit 19: Recent share price performance comparison

% change

One month

Three months

One year

YTD

From 12m high

UK brokers

Numis

16.8

10.9

-5.4

10.2

-8.2

Arden Partners

0.0

2.9

-41.0

-36.8

-41.9

Cenkos

-12.5

-4.5

-35.4

-41.7

-43.2

FinnCap

-7.2

-16.2

N/A

-22.8

-23.8

WH Ireland

-1.0

-3.0

-14.9

-28.1

-35.3

UK brokers average

-0.8

-2.0

-24.2

-23.9

-30.5

US, European IB and advisory

Bank of America

0.8

17.0

31.8

36.0

-0.9

Evercore

-3.2

-6.0

-1.4

5.8

-23.4

Goldman Sachs

-0.5

4.6

23.5

32.8

-1.6

Greenhill

-9.7

12.9

-33.2

-31.6

-46.3

JP Morgan

3.1

16.5

30.1

37.7

-1.0

Moelis

-2.8

0.8

-9.1

2.2

-27.8

Morgan Stanley

0.9

15.1

20.0

25.1

-1.3

Stifel Financial

1.5

9.8

36.1

49.0

-2.8

Credit Suisse

-0.2

4.3

17.4

20.6

-7.9

Deutsche Bank

-5.2

-10.8

-15.1

-6.1

-21.4

UBS

-3.4

8.7

-5.0

-2.5

-13.6

US, European IB and advisory average

-1.7

6.6

8.6

15.4

-13.4

Source: Refinitiv, Edison Investment Research. Note: Priced at 9 December 2019.

Exhibit 20: Financial summary

£000s

2015

2016

2017

2018

2019

2020e

Year end 30 September

PROFIT & LOSS

Revenue

 

 

97,985

112,335

130,095

136,047

111,610

125,525

Administrative expenses (excl. amortisation and depreciation)

(65,018)

(76,120)

(83,626)

(94,603)

(85,432)

(92,810)

Share based payment

(4,104)

(6,229)

(10,454)

(10,583)

(10,914)

(11,000)

EBITDA

 

 

28,863

29,986

36,015

30,861

15,264

21,715

Depreciation

 

 

(882)

(1,126)

(1,226)

(1,113)

(1,124)

(1,100)

Amortisation

(111)

(125)

(89)

(49)

(44)

(30)

Operating Profit (before amort. and except).

 

 

27,870

28,735

34,700

29,699

14,096

20,585

Net finance income

190

37

188

212

550

560

Other operating income

(1,978)

3,759

3,431

1,733

(2,210)

0

Profit before tax

 

 

26,082

32,531

38,319

31,644

12,436

21,145

Tax

(4,533)

(6,132)

(7,942)

(4,967)

(3,110)

(4,018)

Profit after tax (FRS 3)

 

 

21,549

26,399

30,377

26,677

9,326

17,127

Average diluted number of shares outstanding (m)

117.6

118.0

117.2

115.8

114.8

113.2

EPS - basic (p)

19.5

23.5

27.4

25.1

8.8

16.5

EPS - diluted (p)

 

 

18.3

22.4

25.9

23.0

8.1

15.1

Dividend per share (p)

11.50

12.00

12.00

12.00

12.00

12.00

NAV per share (p)

102.0

113.5

125.0

135.0

131.7

134.5

ROE (%)

19%

22%

23%

19%

6.6%

12.4%

EBITDA margin (%)

29.5%

26.7%

27.7%

22.7%

13.7%

17.3%

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

28.4%

25.6%

26.7%

21.8%

12.6%

16.4%

BALANCE SHEET

Fixed assets

 

 

6,724

5,522

6,147

8,215

6,832

6,202

Current assets

 

 

279,114

312,462

407,850

533,033

326,641

328,140

Total assets

 

 

285,838

317,984

413,997

541,248

333,473

334,342

Current liabilities

 

 

(170,319)

(188,895)

(280,371)

(398,112)

(195,319)

(195,319)

Long term liabilities

0

(12)

0

0

0

0

Net assets

 

 

115,519

129,077

133,626

143,136

138,154

139,023

CASH FLOW

Operating cash flow

 

 

6,467

48,735

43,369

45,830

(2,748)

28,557

Net cash from investing activities

(3,632)

84

(198)

(1,014)

(77)

200

Net cash from (used in) financing

(17,510)

(19,580)

(36,359)

(29,035)

(24,646)

(27,258)

Net cash flow

 

 

(14,675)

29,239

6,812

15,781

(27,471)

1,499

Opening net (cash)/debt

 

 

(74,518)

(59,591)

(89,002)

(95,852)

(111,673)

(84,202)

FX effect

 

 

(252)

172

38

40

0

0

Closing net (cash)/debt

 

 

(59,591)

(89,002)

(95,852)

(111,673)

(84,202)

(85,701)

Source: Company data, Edison Investment Research

Contact details

Revenue by geography

The London Stock Exchange Building,
10 Paternoster Square,
London, UK
EC4M 7LT
+44 (0)20 7260 1000
www.numiscorp.com

Contact details

The London Stock Exchange Building,
10 Paternoster Square,
London, UK
EC4M 7LT
+44 (0)20 7260 1000
www.numiscorp.com

Revenue by geography

Management team

Co-CEO: Alex Ham

Co-CEO: Ross Mitchinson

Alex together with Ross Mitchinson is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Alex joined Numis in August 2005 and after a short stint as an equity research analyst, joined the corporate broking team where he played a critical role in building and developing Numis’s retained corporate client base and equity capital markets capability. He was appointed head of corporate broking & advisory in May 2015 and co-CEO in September 2016.

Ross is jointly responsible for Numis’s strategic development as well as the day-to-day management of the main trading entity, Numis Securities. Ross joined Numis in October 2008 and was appointed head of sales in 2014 and head of equities in 2015. He has been a board member of NSL since 2012. Ross held positions at both UBS and Kaupthing Singer & Friedlander prior to joining Numis.

Chief Financial Officer: Andrew Holloway

Andrew was appointed as CFO in January 2018. He joined Numis in 2009 and played a prominent role in the development of the firm’s corporate broking & advisory department, gaining varied experience in serving many of Numis’s financial services sector corporate clients. He is a qualified chartered accountant and before joining Numis was a member of the UK corporate finance team at Dresdner Kleinwort.

Management team

Chief Financial Officer: Andrew Holloway

Co-CEO: Alex Ham

Co-CEO: Ross Mitchinson

Principal shareholders (as at 14 November 2019)

(%)

Aktieselskabet AF 1.3.2017 (Anders Holch Povlsen)

23.1

IPGL (Michael Spencer)

6.1

Aviva

5.9

Kayne Anderson Rudnick IM

5.1

Unicorn UK Income

4.9

GVQ IM

4.4

Cambridge Global AM

4.4

Marcus Chorley

3.5

Companies named in this report

Cenkos (CNKS), Arden Partners (ARDN), WH Ireland (WHI)


General disclaimer and copyright

This report has been commissioned by Numis Corporation and prepared and issued by Edison, in consideration of a fee payable by Numis Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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

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

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

General disclaimer and copyright

This report has been commissioned by Numis Corporation and prepared and issued by Edison, in consideration of a fee payable by Numis Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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

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

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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