Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
In its update for the three months to end June (Q320) Numis reported that revenues were materially ahead of both Q120 and Q220. Both Investment Banking and Equities performed well. Within Investment Banking, IPO and M&A activity remained at very low levels and the driver has been an increased number of capital markets transactions as companies strengthen balance sheets. Among more than 100 transactions raising c £14.5bn in the period, examples included capital raisings for ASOS (£247m), Beazley (£247m), Ocado (£657m) and Unite (£300m). On the Equities side of the business, trading volumes subsided from the peak seen with the onset of COVID-19, but this was more than offset by a continuation of the strong trading gains from the first half.
London Stock Exchange data shows a substantial pick up in capital raisings over the last three months (see Exhibits 3 and 4) while the number of new issues remains subdued. The group reports a good pipeline of transactions and, subject to the market background in the final quarter, looks for second half revenues and profits to be ahead of the first half. Given the uncertain background, we had previously shown a range of scenarios rather than a point estimate for FY20, but, following the update, have adopted the high scenario (with revenue of £135m) as our estimate, noting that the outcome could be higher if the market background facilitates a continued strong pace of transactions.
Numis shares have responded to higher levels of transactions and trade on a price to book multiple of 2.4x, above the 10-year average of 2.0x but still well below peak levels of around 3.0x during this period. From another perspective, based on a ROE/COE model, the current share price implies a market assumption that Numis can attain a sustainable return on equity of between 18% and 19%. This is above our current year estimate (14%) but in line with a five-year historical average.