Numis has made good progress in the first half of 2018 with particularly strong revenues in corporate broking and advisory and a resilient result from the equities activity. Investment in people and platforms to support future growth and our expectation of lower portfolio gains restrains our earnings estimates for the moment but healthy deal pipelines, continued growth in the corporate client base and the strong balance sheet are positive indicators for the future, subject to market fluctuations.
Overall revenues were up 42% compared with H117 and just 5% below the particularly strong second half last year. Capital markets showed the strongest advance from the prior year period at +94% closely followed by advisory, +86%. Equities revenues were virtually unchanged, reflecting a moderate reduction in trading profit and a slight increase in institutional income. The implementation of MiFID II in Numis’s second quarter has so far been navigated without obvious adverse impact and the institutional client base is reported as being materially unchanged: an important feature for corporate clients. While costs did increase significantly (+27%) reflecting both variable compensation and investment in new staff, the operating margin increased and pre-tax profits rose 87% to £19.5m.
Market levels have recovered close to where they started the calendar year and volatility has subsided from the spike seen earlier. If sustained, together with the strong pipeline of transactions Numis itself reports, this could produce positive surprises versus estimates in the remainder of the year (see page 4 for details of estimate changes). The outlook for M&A activity appears particularly promising as Numis indicates that more of its clients are looking to pursue their strategies through corporate deals and have the liquidity to support this. In the first half Numis benefited from higher average deal fees, reflecting both higher average size and increased seniority in syndicates, features that both tend to confirm further strengthening of its franchise. Even if these measures fluctuate in future periods, continuation of a positive trend would contribute to growth through market cycles.
The shares have risen by 57% over the last 12 months, but the P/E still does not look particularly stretched in comparison to a broad peer group. The price to book is above average but this is paired with an above-average ROE. On our assumptions a ROE/COE model implies that the market is factoring in a sustainable ROE of c 24%, which does not seem overly aggressive.