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.
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.
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.
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).