Buoyed by £31.5m of revenue earned from the flotation of the AA, the emergency car recovery company which appointed Cenkos Securities as the sole co-ordinator and bookrunner, turnover more than trebled to £65m in the first six months of 2014, exceeding the £51.4m total for the whole of last year. In turn this drove up half year profits almost eightfold from £3m to £23.5m, more than double the £10.7m made in 2013. To put this performance into some perspective, when I last updated my view (‘Going for broke’, 8 July 2014), I thought that Cenkos could easily “deliver full-year pre-tax profit of between £16m and £18m and EPS as high as of 22p”.
In the event the company has smashed these expectations by completing 18 transactions in the six month trading period, raising £1.39bn for the AA and a further £824m for 17 of its other 126 clients. Notable capital raises include a £150m equity raise for Imperial Innovations (IVO), the investment company that invests in pioneering technologies developed from the academic research of the UK's four leading Universities, and $225m (£139m) for RM2 (RM2), the Aim-traded pallet company that came to the market in January.
Admittedly, the market backdrop has been benign for equity market fund raisings this year: total funds raised on the junior market have risen from £1.4bn in the first half of 2013 to £3.7bn in the first six months of this year. As one of the leading brokers for growth companies, and the second largest nominated advisor for all AIM companies, Cenkos has been ideally placed to capitalise on this strong tailwind. As a result, corporate finance fees more than quadrupled in the six month period to £54m. The favourable back drop also helped boost revenues from corporate broking, market making and commission related work by over half to £11m. The company’s trading desks make markets in 340 companies including all its clients.
Prospects for bumper returns
And with revenues and profits surging, so have the company’s cash balances which ballooned from £30.3m at the start of the year to £43.2m, or the equivalent of 68p a share. Shareholders are benefiting from this robust cash generation as the half year dividend has been doubled to 7p a share (at a cost of £4.4m). Cenkos’ board anticipates a significant rise in last year’s full-year payout of 12p a share too.
In addition, share-buy backs are being considered to return capital back to shareholders. It would certainly make sense to do so because with the company reporting EPS of 31.2p for the six month period, even if it only matches the second half performance last year – Edison Investment Research’s EPS estimates are under review post this massive earnings beats – then expect full-year EPS well north of 40p. In other words, share buy-backs would be significantly earnings enhancing with Cenkos’ shares trading on a modest six times 12-month rolling earnings.
Realistically, the forward earnings multiple is likely to be even lower because excluding the income earned from the AA IPO, Cenkos’ revenue surged by two thirds in the first half to £33.7m and was up from £31.4m reported in the second half of last year. In other words there is real momentum in the business. The investment case is further underpinned by an encouraging pipeline of new business. Bearing this in mind, it’s worth noting that the AA deal illustrates to other companies looking at floating that Cenkos is capable of doing large deals. It’s notable too that the IPO was not only the biggest in Europe this year, but one of the best performing too. It’s hardly a surprise that Cenkos “continues to explore larger transaction opportunities based on the success of the first half”.
So with analysts set to upgrade their full-year numbers significantly in the coming days, and the company likely to embark on an earnings enhancing share buy-back programme, I feel the rerating has some way to go. Having initiated coverage on the shares at 159p (‘Broking for success’, 20 May 2014), I feel that my 270p to 295p target price is not only reasonable but could prove conservative if the market for equity fundraising remains strong. Trading on a bid-offer spread of 240p to 250p, Cenkos' shares rate a strong buy.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
