2019 was a difficult year for UK equity capital markets activity, and Cenkos demonstrated the strength of its flexible business model and the client relationships sustained by its staff, achieving full year profitability despite one-off restructuring costs. Lower fixed costs will benefit future earnings and Cenkos reports a positive start to 2020 with a strong pipeline. Conservatively, we have reduced our revenue/earnings assumptions for this year, but improved market/investor confidence could generate significant upside.
Cenkos noted the challenging equity market conditions that were a feature of 2019 with reduced equity issuance and institutional trading activity. Against this background, it took steps to reduce its cost base and indicates that the annual fixed cost base is expected to be more than £3m below the level of 2019. The restructuring will give rise to one-off costs of approximately £1.4m in H219. Despite this additional cost, an improvement in second half revenues, supported by a number of significant fund-raisings, has (subject to audit) allowed a return to profitability in the second half and for the full year following a £0.2m pre-tax loss in the first half.
Cenkos indicates that the stronger momentum seen in the second half of 2019 has continued into the current year and that the strength of its transaction pipeline is encouraging. Reflecting this, the board expects to announce a final dividend with its full year figures in late March. Taking into account the update comments, we have tempered our revenue and recurring cost assumptions for 2019, leaving PBT at £0.25m (£1m previously), including the £1.4m restructuring cost. Given macro uncertainties potentially affecting investor and corporate confidence, we have chosen to adopt a more conservative revenue assumption for 2020 (and sensitivity range – see Exhibit 3) but still look for a 20% recovery in revenues and a significant profit bounce to £2m, with the potential for positive surprises if equity market activity builds and sustains further strength.
On our assumptions (page 3), the current share price implies that the market is assuming an ROE of c 12% for Cenkos, above our current year estimate of 6%. However, this would represent a still relatively depressed level and over 10 years the group has achieved an average ROE of 26%. Similarly, the current price to book ratio of 1.3x compares with a 10-year average of 2.3x.