A trading update at last month’s annual general meeting was clearly positive. In that statement chairman Gerry Aherne noted that the company “continues to trade well and revenues are well ahead of the same period last year. Our pipeline of potential new business activity remains strong”. In other words, having lifted revenues by almost a fifth to £51.4m and increased underlying pre-tax profits by over a half to £10.7m, Cenkos is still blazing ahead despite the stiff comparatives from last year. On that basis, EPS almost doubled to 14.2p and given the board’s progressive dividend policy, this resulted in a payout of 12p a share including a final dividend that more than doubled to 8.5p a share. This means Cenkos shares are trading on a modest historic PE ratio of 11 and offer a chunky dividend yield of 7.5 per cent.
This was no one-off either. Since listing on the Alternative Investment Market eight years ago, Cenkos has paid out a total of 84.5p a share in dividends. Expect this generous policy to continue as the board have ample resources at their disposal to fund and grow the business enabling them to pay out a high percentage of earnings to shareholders. In fact, Cenkos is debt free and cash on the balance sheet of £30m equates to around 30 per cent of its market capitalisation.
There is every incentive for the directors to pursue such a policy as chief executive Jim Durkin owns 9.01 per cent of the 63.5m shares in issue and founding shareholder Paul Hodges controls a further 9.23 per cent. The board have also been making astute share buy-backs over the years having bought back 9.3m shares in total at an average price of 70p. That makes sense because with the shares trading on only 11 times earnings, a multiple that is set to fall in the current financial year if the positive trading trend persists, then share buy-backs enhance both earnings per share and underpin the share price too.
The investment case is also well supported by the resilient nature of the business model. In fact, Cenkos has been profitable every year since it was founded a decade ago. Activities include providing corporate broking and securities services to small and mid-cap growth companies across a wide range of industry sectors. As nominated adviser (Nomad) or corporate broker to 125 companies, Cenkos is rated as one of the leading brokers in the London market for growth companies and the number two stockbroker by the number of Aim clients.
A sound revenue stream
Primarily Cenkos earns fees from primary and secondary equity fund raising, 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. Last year, Cenkos completed 47 transactions on behalf of clients, including six primary issuances.
On the corporate finance side, fees are generated 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. In addition, commission is earned for published equity research.
Cenkos also makes markets in the securities of all the companies where it has a broking relationship to support the other services provided to those clients. It actively provides liquidity to the market and facilitates institutional business in both small and large cap equities. In fact, Cenkos’ trading desks make markets in the shares of 341 companies and investment trusts. But the amount of capital committed here is restricted so that these operations are not ever exposed to market risk. That’s only sensible.
Importantly, the business model has been designed to minimise the impact of lower revenues by ensuring that performance-related pay falls too. Clearly, a key risk to the business is that income is dependent on the health of the financial markets and, in particular, the economic conditions of the UK which in turn impacts the market for equity fundraising. This also helps explain the strong financial performance last year which was achieved against a backdrop of recovering equity markets. It’s worth noting too that a relatively low fixed cost base and a remuneration structure highly geared to performance means that profits will increase significantly in a positive operating cash cycle.
Obviously, the quality of staff is critical in a people business. Bearing this in mind, rewards to staff are aligned with those to shareholders, a meritocratic model that works well. Employees are remunerated above their peers, but with their shareholdings high and performance related pay a key element in their packages, then costs are kept in check.
Upside risk to forecasts
I understand that Cenkos’ year to date order book trades are up around 30 per cent, and capital raising is well ahead of the comparable period last year. Fundraising raises this year include £100m for support services company Regenersis (RGS) and an £80m raise for closed-end investment company GCP Infrastructure (GCP).
As a result analysts Mark Thomas and Mark King at research firm Edison conservatively expect the company’s revenues to rise by 10 per cent this year to £56m to drive pre-tax profits up by around six per cent to £11.3m. However, they also point out that “should current market conditions continue, there is material upside to these estimates.” I would agree and feel that the risk is definitely skewed to the upside on these forecasts. Based on current estimates, expect EPS of 14.7p and a raised dividend of 13p a share. On this basis, the prospective yield is over 8 per cent.
It’s worth noting too that the company produces a healthy return on equity (ROE) – 36 per cent last year - well above its cost of capital. So with the business performing well, earnings estimates on the conservative side, and the company issuing an upbeat trading update, then in my view the current valuation is not just attractive, but anomalous too.
Trading on a bid offer spread of 156p to 159p, well shy of this year’s high of 184p, I rate the Aim-traded shares a decent income buy and have a year-end target price of 190p. Buy.
Finally, I am still working my way through a list of companies on my watchlist, including API (API) and a number of housebuilders.
■ Due to a technical glitch, the complimentary postage offer for IC readers purchasing my book Stock Picking for Profit ended prematurely last week. Subject to availability, the offer has been extended to 26 May for all internet orders placed at www.ypdbooks.com. Please use offer code ICOFFER when ordering online. The book is priced at £14.99, plus £2.75 postage and packaging. Telephone orders placed with YPDBooks (01904 431 213) will continue to incur the £2.75 fee. I have also published an article outlining the book's content: 'Secrets to successful stock picking'
