The reason for this negative sentiment is due to the company’s association with beleaguered insurance outsourcer Quindell (QPP: 44p). Cenkos is Quindell’s corporate broker and nominated advisor, having previously been joint broker with Canaccord prior to it’s resignation, details of which emerged on Monday this week. As I noted earlier this week in my article on Nationwide Accident Repair Services, a company in which Quindell owns a stake (‘Exploiting valuation anomalies’, 18 November 2014), serious corporate governance issues have emerged at Quindell which culminated in the resignation of founder and chairman Rob Terry and non-executive director Steve Scott. Finance director Lawrence Moorse will be stepping down from the board after the 2015 annual meeting. All three directors participated in a controversial sale and repurchase agreement with Equities First Holdings, the full details of which only came to light after the company was forced to make a further announcement to the London Stock Exchange to clarify the situation.
I have already gone on record in response to reader inquiries that Quindell is not a company I would get involved in given the chequered track record of founder Rob Terry and the way that his previous listed company, Innovation Group (TIG: 26.5p) adopted a similar highly acquisitive business model prior to Mr Terry's exit a decade ago. My colleague Philip Ryland produced an insightful feature on Quindell in the summer (‘Quindell conundrum’, 31 July 2014) which brought to attention issues investors should consider before investing in the company.
The key issue for me is not whether the directors of Quindell have acted inappropriately – the fact that all three have resigned from their position says enough – but whether Cenkos should be tarred by the same brush having decided to do business with the company in the first place. The fact that Quindell’s directors entered into a controversial transaction with Equities First Holdings, and one where full disclosure was lacking at the time of the transaction being entered into, shows a lack of judgement on their part. Shares in Quindell have fallen by 60 per cent since news of the Equities First Holdings transaction emerged on 5 November. However, it was the director’s decision to sell down part of their holdings, and not that of the corporate broker to do so.
But clearly in the minds of some investors the mark down in Cenkos shares reflects the potential for reputational damage to the broking house. Bearing this in mind, it’s worth taking a good look at Cenkos’ track record and the other listed companies it does business with.
A robust client list
I would firstly point out that Quindell is just one client as Cenkos is nominated adviser, broker or financial adviser to 127 companies or trusts. It has also successfully raised over £11bn for clients in fundraisings since being formed in 2005, the vast majority of which was raised when acting as sole broker. Sifting through its client lists reveals a number of high quality small cap growth companies including the likes of office service provider Restore (RST: 248p), many of which have raised funds this year. And of course, its largest client – roadside rescue firm, the AA (AA.: 348p) – is one of this year’s very few IPO success stories. AA appointed Cenkos Securities as the sole co-ordinator and bookrunner in its June IPO, raising £1.39bn for the company. Cenkos also raised £824m for 17 of its other 126 clients in the first half this year, and a further £214m for another 13 clients since then.
The question now is whether the Quindell fiasco will deter other listed companies from employing Cenkos as corporate broker or nomad, or whether existing clients will decide to move on? On both counts, I feel the market has over reacted and we need some perspective here. It’s not as if Cenkos was the only City firm that made an error of judgement by supporting an error prone company. Indeed, asset management groups M&G, Fidelity and Investec are Quindell’s biggest institutional shareholders and large hedge funds Polygon and Algebris have invested in the company too. True, some of Cenkos’ own clients will be sitting on nasty losses on their Quindell shareholdings, but as unfortunate as that is it is part and parcel of the stock market. There will be many other companies the broker has put its clients into that have done well.
In terms of the bigger picture, it’s worth noting that the trend for corporate fundraisings is positive. With a substantial client base and presence in the London market I would still expect Cenkos to pick up its fair share of future deals. Indeed, Xavier Rolet, chief executive of the London Stock Exchange (LSE), noted at the time of his company’s financial results earlier this month that the LSE's pipeline remains very strong and he expects to see some of the larger IPOs emerging between now and the first quarter of next year. Mr Rolet also noted the steady stream of new listings on Aim.
In the circumstances, I feel that to de-rate Cenkos’ shares so severely simply because it is broker to one company where there are serious management issues is harsh to say the least. Quindell’s growth story was accepted by many high profile city names to the extent that by April this year the company boasted a £2.5bn market capitalisation, having seen its shares rise more than eightfold since May 2013.
A value opportunity
It’s also clear that after the sharp derating there is value in Cenkos’ shares. After accounting for the payment of a 7p a share interim dividend, the company is sitting on 61p a share of cash on its balance sheet, or the equivalent of more than a third of the current share price. Factoring in the payment of a 13p a share full-year dividend, rising to 16p a share in 2015 as analysts Mark Thomas and Martyn King predict, then the prospective dividend yields are 8.2 per cent and 10.1 per cent, respectively.
Clearly, the £31.5m revenue windfall from the AA IPO is a one-off, but I feel that Edison’s forecasts for 2015 are conservative. They predict more 'normal' revenues of £60m, pre-tax profits of £12.4m and EPS of 17.8p for next year which would represent a flat performance on 2014 once you strip out the AA contribution. But even if they are right, and after adjusting the cash pile for the payment of bonuses in the first half of 2015 to reflect this year’s bumper trading performance, I still reckon Cenkos shares are being priced on 7 times cash adjusted earnings.
In my book, a single digit PE ratio and a high dividend yield represent value, so it will be interesting to see whether Cenkos’ board take advantage of their company’s depressed share price to undertake earnings enhancing share buy backs. They have done so before and it would send a very positive signal to shareholders to arrest the share price decline. Share buy backs were being considered at the time of the interim results in September and given the share price slump since then at the current level they would be significantly earnings accretive.
In the circumstances, if you followed my previous advice to buy Cenkos shares I would recommend holding on given their recovery potential when the fall-out from the Quindell affair blows over. Hold.
■ Simon Thompson's 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 stockpicking'
