Cenkos Securities: Upside Gearing In Favourable Market Conditions
Edison | Oct 14, 2014 12:37AM ET
AA super-charged
As shown by the positive trading statement, and with the financial benefits of the AA IPO, Cenkos Securities Plc (LONDON:CNKS) has delivered excellent H114 results. The relative operational gearing (revenue up 226%, cost up 143%) is better than the historic cost income of the group, showing good leverage and confirming that Cenkos’s performance-related model not only limits downside risk, but gives investors upside gearing in favourable market conditions. The outlook comment is positive. The dividend was doubled and the possibility of other capital returns has been indicated.
H114 results
The key business messages from H114 included revenue up 226% to £65.2m. Excluding the large £1.4bn AA IPO (£31.5m of revenue), residual income was up 69%. Total IPO and secondary funds raised were £2.2bn (H113: £0.4bn) and there were four M&A transactions (H113: two). Corporate clients rose to 127 (from 122) and corporate finance income from £13.1m to £54.2m. Costs rose by 143% (£24.8m) including performance-related pay, an increase of 10% in headcount and a £0.9m increase in the dividend related CAP bonus (see below). Pre-tax profits rose 653% to £23.5m, and basic EPS by 700% to 31.2p. The dividend was doubled to 7p. The FY14 dividend is expected by Cenkos to be above the 12p paid in FY13. Other capital distributions including buy-backs are being considered.
Outlook
Staff attracted to Cenkos’s performance-related model are incentivised to deliver good business in favourable market conditions, giving investors geared upside. The model has historically also limited downside risk in weaker markets. While the H114 AA deal was large, it is indicative of the former aspect of the business. Market uncertainty means that any near-term forecasts need to be treated with caution (with both upside and downside potential). We note that after a strong Q1 the market-wide volume of trading and new issues has been somewhat weaker in Q2.
Valuation: 30% upside
Cenkos’s policy of high capital distribution of profits means it has a good yield (2014e 7.5%). Our future dividend payments have been increased slightly and we have built in a £10m other capital distribution this year. The DDM valuation approach is now at 218p. The Gordon’s growth model indicates a value of 240p. Our forecasts are for business as usual and there is further upside if Cenkos generates further large transactions, which the AA deal has proved it can deliver.
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