The price move is fully justified after the company revealed a fortnight ago that revenues and pre-tax profit for the six months ending 30 June 2014 are expected to be in excess of those reported for the whole of last year and significantly higher than market expectations for this year.
To put this performance into some perspective, having lifted revenues by almost a fifth to £51.4m and increased underlying pre-tax profits by over a half to £10.7m in 2013, Cenkos has smashed those stiff comparatives from 2013 when EPS almost doubled to 14.2p. Analysts Mark Thomas and Mark King at research provider Edison had previously conservatively expected the company’s current year revenues to rise by 10 per cent to £56m and drive pre-tax profits up by around 6 per cent to £11.3m, but when they publish their new estimates expect some major upgrades. My own view is that I would not be surprised at all to see Cenkos deliver full-year pre-tax profit of between £16m and £18m and EPS as high as of 22p. On that basis, the prospective PE ratio could be as low as 11.5.
Moreover, given the board’s progressive dividend policy, expect a further rise in the annual payout of 12p a share. An historic yield of in excess of 5 per cent is already attractive, and with profits soaring, another chunky dividend hike is on the cards. It would be par for the course because since listing on the Alternative Investment Market eight years ago, Cenkos has paid out a total of 84.5p a share in dividends. The board can certainly afford to be generous since they have substantial resources available to fund the growing business so are in the fortunate position of being able to return a high percentage of annual earnings to shareholders.
In fact, Cenkos is debt free and cash on the balance sheet of £30m equates to 20 per cent of its market capitalisation of £148m. The directors have every incentive for the dividend to be raised again since both chief executive and founding shareholder Paul Hodges and Jim Durkin each own over 9 per cent of the 63.5m shares in issue. Edison predicted a 13p a share dividend in fiscal 2014, implying a prospective yield of 5.5 per cent, but this now looks far too conservative.
Admittedly, part of the bumper profits earned in the first half of this year reflect earnings from the IPO of AA, the emergency car recovery company which appointed Cenkos Securities as the sole co-ordinator and bookrunner. However, the windfall aside, the investment case is well underpinned by the resilient nature of the business model. In fact, Cenkos has been profitable every year since it was founded a decade ago.
A sound revenue stream
To recap, Cenkos primarily earns fees from primary and secondary equity fundraising, acting as an intermediary between growth companies or investment funds and institutional providers of capital. The aim is to provide equity financing and shareholder lists for clients and generate healthy returns for institutional investors. On the corporate finance side, fees are earned by providing strategic advice and regulatory guidance to clients, as well as advice on all forms of corporate transactions including mergers and acquisitions, disposals, and restructurings. On the market making side, Cenkos makes markets in securities to support the other services provided to those clients and actively provides liquidity to the market and facilitates institutional business in both small- and large-cap equities.
Clearly, the quality of staff is critical, so rewards to staff are aligned with those to shareholders, a meritocratic model that works well. Employees are remunerated above peers, but with shareholdings high and performance-related pay an important element in their packages, costs are kept in check.
It is also apparent to me that with the bull market ongoing, Cenkos is in a sweet spot right now. Year-to-date order book trades were up around 30 per cent when the company last reported and capital raisings were well ahead of the comparable period last year, well before the IPO of the AA. True, primary fund raisings in the London market may have hit a summer lull, but I would expect renewed enthusiasm from the end of the third quarter onwards as equity markets enter the seasonally positive autumn and winter months. This can only be good for Cenkos.
Raised target prices
So, with the business performing well, earnings estimates smashed, upgrades on their way, and the company issuing yet another upbeat trading update, in my view the current valuation is still attractive even after a near 50 per cent share price rise in the past seven weeks. I may even be erring on the conservative side in my earnings estimates.
Needless to say, trading on a bid-offer spread of 228p to 233p, I continue to rate the Aim-traded shares a decent income buy and have raised my year-end target price to a range between 270p and 295p. 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'
