Cenkos Securities — Making hay when the sun shines

Cenkos Securities (AIM: CNKS)

Last close As at 27/03/2024

29.00

0.00 (0.00%)

Market capitalisation

GBP15m

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Research: Financials

Cenkos Securities — Making hay when the sun shines

Cenkos Securities’ H117 result was strong with a pre-tax profit increase of over 150% bolstered by the Eddie Stobart IPO, which provided further evidence of the company’s ability to complete larger transactions as well as a flow of smaller deals. The second half has started well and, subject to market conditions, the pipeline is reported to be healthy. Our FY17 earnings estimate has been increased by nearly 11%. Revenue and profit are subject to market fluctuations but the business model of contained fixed costs and high variable compensation mitigates the impact of this. The valuation both in terms of P/E and yield appears cautious.

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Financials

Cenkos Securities

Making hay when the sun shines

H117 results

Financial services

6 October 2017

Price

117p

Market cap

£66m

Net cash (£m) at end June 2017

19.8

Shares in issue

56.7m

Free float

62%

Code

CNKS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

17.6

20.6

25.8

Rel (local)

15.5

18.0

16.9

52-week high/low

122.0p

69.0p

Business description

Cenkos Securities is an independent, specialist institutional securities group, focused on growth companies and investment funds. Its principal activities are corporate broking and advisory and institutional equities.

Next events

FY17 results

March 2018

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Cenkos Securities is a research client of Edison Investment Research Limited

Cenkos Securities’ H117 result was strong with a pre-tax profit increase of over 150% bolstered by the Eddie Stobart IPO, which provided further evidence of the company’s ability to complete larger transactions as well as a flow of smaller deals. The second half has started well and, subject to market conditions, the pipeline is reported to be healthy. Our FY17 earnings estimate has been increased by nearly 11%. Revenue and profit are subject to market fluctuations but the business model of contained fixed costs and high variable compensation mitigates the impact of this. The valuation both in terms of P/E and yield appears cautious.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

88.5

27.0

35.2

17.0

3.3

14.5

12/15

76.5

19.9

27.2

14.0

4.3

12.0

12/16

43.7

4.4

4.7

6.0

24.9

5.1

12/17e

58.0

8.4

12.4

11.0

9.4

9.4

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

H117 results

Cenkos’ first half revenues increased by more than 90% from H116 and were 3% ahead of the stronger H216, reflecting the contribution from fees generated by the £386m Eddie Stobart Logistics IPO and a generally improved market background that fed into strong market-making profits. Continuing pressure on commission rates meant that corporate broking, research and commission revenue was down 15%. Variable compensation contributed to an 82% increase in costs from H116, which still left pre-tax profits (£4.2m) 156% up on the prior year period and, with the benefit of a lower tax charge, earnings per share were five times last year’s level at 6.1p. The interim dividend proposed is 4.5p compared with 1.0p.

Outlook

Equity market levels have risen substantially since June last year (FTSE All-Share total return index +19%) and sustained higher levels despite a range of uncertainties surrounding Brexit and global geopolitical developments. While this remains the case the environment for transactions is supportive and Cenkos has already undertaken a number of significant fund-raisings in the second half and reports a good pipeline of potential transactions. In 2018 the implementation of MiFID II is generally expected to exert further downward pressure on commission income (part of the 15% of H117 revenues from corporate broking, research and commission). In the longer term, Cenkos’ flexible cost base, its track record in completing transactions for both SME and larger companies and the breadth of its 120-strong client base are positive features.

Valuation

Both yield and P/E multiple appear attractive, even allowing for the equity market sensitivity of earnings and dividends. An ROE/COE based valuation (page 3) points to a valuation of 194p (previously 189p).

H117 results review

Exhibit 1 gives a P&L analysis for the first half. Salient points are as follows, with percentage changes from H116 unless stated.

Within the 91% revenue increase, corporate finance and placing fees together with market making were the positive drivers. As noted earlier, the Eddie Stobart IPO was a significant contributor (one client is identified as contributing £10.59m). Market-making revenue included benefits from gains on shares and warrants received in lieu of fees of £1.29m (H116 loss £1.63m).

The cost increase of 82% was the result of higher variable compensation together with costs arising from an extensive exercise to strengthen systems and controls following regulatory breaches reported last year in relation to Cenkos’ provision of sponsor services. Investment has also been made in preparation for MiFID II and the Senior Managers and Certification Regime.

A reduction in tax charge amplified the 156% pre-tax profit increase to 406% at the EPS level.

The dividend was increased by 350% to 4.5p and Cenkos notes that since flotation it has made cash returns to shareholders (dividends and share buybacks) of 160.8p (or 165.3p once the interim dividend has been paid).

Exhibit 1: H117 Profit and loss analysis

£000s

H116

H216

H117

% change
vs H116

% change sequentially

Corporate finance & placing fees

9,675

20,045

21,209

119%

6%

Corporate broking, research, and commission

5,106

5,399

4,351

-15%

-19%

Market making

563

2,957

3,689

555%

25%

Total revenue

15,344

28,401

29,249

91%

3%

Recurring Administration expenses

(13,726)

(25,700)

(25,032)

82%

-3%

Operating profit / loss

1,618

2,701

4,217

161%

56%

Investment income

32

51

8

-75%

-84%

Pre-tax profit

1,650

2,752

4,225

156%

54%

Tax

(997)

(861)

(904)

-9%

5%

Attributable profit

653

1,891

3,321

409%

76%

EPS (p)

1.2

3.4

6.1

406%

79%

DPS (p)

1.0

5.0

4.5

350%

-10%

Source: Cenkos Securities, Edison Investment Research

Since the beginning of the year there have been several board changes. In May Nick Wells stood down from the board but remains with the company, focusing on developing the corporate finance operations. Jim Durkin, a founder shareholder in Cenkos, retired as chief executive and director at the beginning of August, with his role assumed by existing non-executive director Anthony Hotson. Hotson has substantial financial sector experience including roles at the Bank of England, SG Warburg and Henderson Group. He joined the board in May 2012, so has a good understanding of the culture of the business. Finance director Mike Chilton also resigned as a director in August and Philip Anderson, previously at Curo Financial Technologies and Virgin Money Holdings, has been appointed as finance director.

In the next table we have collated the placing and IPO transactions highlighted on the company’s website (it excludes tap issues for investment companies, for example). This confirms the comments made about a good start to the second half, with the total raised for clients so far totalling £523m. This compares with the £702m shown here for the first half (the actual first half total raised including other transactions not recorded here was £982m).

Exhibit 2: Highlights of completed transactions for 2017 year to date

Month

Company

Transaction

Consideration

February

Kromek Group

Placing

£21m

Mercia Technologies

Placing

£40m

GCP

C share issue

£79m

Cello Group

Placing

£15m

UP Global Sourcing Hldgs

IPO

£53m

March

Collagen Solutions

Placing

£8m

88 Energy Ltd

Placing

A$17m

Totally

Placing

£18m

Frontier IP Group

Placing

£3m

April

Corero

Placing

£5.6m

Salt Lake Potash

Fundraise

£7.5m

Eddie Stobart

IPO

£386m

May

Rosslyn Data Technologies

Placing and acquisition

£5m

UK Oil and Gas

Placing

£6.5m

June

Plastics Capital

Placing

£3.7m

1PM

Placing

£13m

Flow Group

Equity placing and loan note subscription

£26.6m

July

Angling Direct

IPO

£9m

Hurricane Energy

CV bond placing

US$230

Hurricane Energy

Equity placing

US$300

Arena Intl Events

IPO

£60m

August

TP Group

Placing

£21.85m

Marlowe

Placing

£10m

Rotala

Placing

£3.5m

FairFX

Placing

£27.7m

Source: Cenkos Securities website

Financials

Our FY17 estimate is increased to reflect the H117 performance and commentary on trading since the half-year end. Our revenue estimate is increased from £52m to £58m and this translates into pre-tax profits of £8.4m compared with £7.8m previously and EPS of 12.4p versus 11.2p. Our full year estimates are set out in more detail in the financial summary table (Exhibit 3).

There was a cash outflow of £4m in the first half, with an operating cash inflow of £1m before working capital items offset by working capital and tax outflows (£1.9m), and a dividend payment of £2.7m, while other items absorbed £0.4m. This left cash and cash equivalents (no debt) of £19.8m at the end of June.

Valuation

In our previous note we derived a valuation based on a simple ROE/COE model using an assumed sustainable ROE of 24% (in line with our current FY17 estimates) and a growth rate of 5%. On the same assumptions, applied to the slightly higher H117 NAV, the implied value is 194p (previously 189p). Alternatively, the current share price would imply an ROE of c 17%, which seems cautious given the average over the last five years has been 36%.

Exhibit 3: Financial summary

£000s

2014

2015

2016

2017e

Year end 31 December

PROFIT & LOSS

Revenue

 

 

88,516

76,513

43,745

58,000

Cost of Sales (excl. amortisation and depreciation)

(61,318)

(56,510)

(39,244)

(49,439)

EBITDA

 

 

27,198

20,003

4,501

8,560

Depreciation

 

 

(386)

(241)

(182)

(200)

Amortisation

0

0

0

0

Operating Profit (before amort. and except.)

 

26,812

19,762

4,319

8,361

Exceptionals

0

0

0

0

Non-recurring items

0

0

0

0

Investment revenues

160

134

83

50

Profit Before Tax (norm)

 

 

26,972

19,896

4,402

8,410

Tax

(5,644)

(4,525)

(1,858)

(1,682)

Profit After Tax (norm)

 

 

21,328

15,371

2,544

6,728

Minority Interests

0

0

0

0

Average number of shares outstanding (m)

60.5

56.5

54.7

54.2

EPS - normalised fully diluted (p)

 

 

35.2

27.2

4.7

12.4

Fully diluted EPS (p)

 

 

33.5

26.8

4.6

12.4

Dividend per share (p)

17.00

14.00

6.00

11.00

NAV per share (p)

0.65

0.53

0.50

0.55

ROE (%)

60%

43%

10%

24%

Cost/income ratio

69.7%

74.2%

90.1%

85.6%

Staff costs/Revenue

64.8%

58.8%

60.1%

69.2%

BALANCE SHEET

Non-current assets

 

 

2,463

1,626

625

675

Intangibles and goodwill

0

0

0

0

Property, plant and equipment

421

296

389

439

Other non-current assets

2,042

1,330

236

236

Current assets

 

 

63,392

64,725

62,692

64,424

Other current assets inc Investments - long positions

10,014

12,706

13,811

13,811

Cash

32,932

33,106

23,795

28,053

Debtors and other

20,446

18,913

25,086

22,560

Current liabilities

 

 

(26,294)

(37,432)

(35,254)

(35,254)

Other current liabilities inc short positions

(2,711)

(2,551)

(2,694)

(2,694)

Short-term borrowings

0

0

0

0

Other current liabilities

(23,583)

(34,881)

(32,560)

(32,560)

Non-current liabilities

 

 

0

(351)

(880)

(880)

Long-term borrowings

0

0

0

0

Other long-term liabilities

0

(351)

(880)

(880)

Net assets

 

 

39,561

28,568

27,183

28,965

CASH FLOW

Operating Cash Flow

 

 

24,137

15,538

(465)

9,060

Working capital and other items

(7,344)

16,184

(1,387)

2,526

Tax paid

(4,815)

(5,049)

(2,533)

(1,682)

Net cash from operating items

 

 

11,978

26,673

(4,385)

9,904

Fixed asset investment

(420)

(174)

(272)

(250)

Acquisitions/disposals

0

0

0

0

Other investing activities

173

191

93

50

Share (purchase)/issuance

244

(16,823)

(438)

0

Ordinary dividends

(9,386)

(9,740)

(4,367)

(5,445)

Other financing

0

47

58

0

Other

0

0

0

0

Net cash flow

2,589

174

(9,311)

4,258

Opening net (debt)/cash

 

 

30,343

32,932

33,106

23,795

FX

0

0

0

0

Closing net (debt)/cash

 

 

32,932

33,106

23,795

28,053

Source: Edison Investment Research, Cenkos Securities accounts

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 Cenkos Securities 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 Cenkos Securities 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.

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

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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