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Bargain Shares: Broking for profitable gains

A corporate broker has delivered 44 per cent higher first half pre-tax profits and hiked its dividend 25 per cent, but is effectively only being priced on a bargain basement five times rolling 12-month profit.
Bargain Shares: Broking for profitable gains
  • First half underlying pre-tax profit surges 44 per cent to £2.8m on 37 per cent higher revenue of £18.2m.
  • Corporate broker secures more than 10 per cent of all funds raised on AIM in latest six-month trading period.
  • Revenue from market making activity trebles to £2.4m against a backdrop of heightened market activity.

Having trebled its underlying pre-tax profit to £4m on 23 per cent higher revenue of £31.9m in 2020, corporate broker Cenkos Securities (CNKS:84p) has maintained the momentum this year.

In the six months to 30 June 2021, the company raised £580m across 16 placing transactions for corporate clients including £400m for Aim companies, or just over 10 per cent of the £3.96bn raised across London’s junior stock market. Fees from this activity boosted corporate finance revenue by 38 per cent to £12.7m. Since the half-year end, Cenkos has completed a further eight fundraisings and two IPOs including a £52m placing alongside the £150m IPO of Lord’s Trading Group (LORD), a specialist UK distributor of building, plumbing, heating and DIY goods.

As one would expect the bull-run in smaller stocks – FTSE SmallCap and FTSE Aim All-Share indices are up 21.4 per cent and 12.4 per cent, respectively, in 2021 – is benefiting Cenkos’ market making activities. The broker’s trading desk maintained a top five market share in 90 per cent of its 100 clients’ shares and made a market in 219 equities and investment trusts, an additional 34 companies compared with the first half of 2020. Revenue from this activity trebled to £2.4m. Although nomad, research and broking fees edged down slightly to £3.1m, client numbers increased from 94 to 100 but this is not reflected in revenue for timing reasons. It will be in the second half.

Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 07.02.20 Bid price 09.02.21 DividendsPercentage change (%)
XaarXAR42p219p0.0p421.4%
CreightonsCRL44p125p1.15p186.7%
Metal Tiger (see note two)MTR11.8p27p0.0p128.8%
Cenkos SecuritiesCNKS56p82p4.5p54.5%
Anglo Eastern PlantationsAEP570p650p1.1p14.2%
NorthamberNAR54.9p57p0.6p4.9%
Chenavari Capital Solutions (see note one)CCSL61.4p35p0.0p3.4%
CIP Merchant CapitalCIP57p57p0.0p0.0%
Brand ArchitektsBAR160p155p0.0p-3.1%
PCF (suspended)PCF33.3p23p0.4p-29.7%
Average     78.1%
FTSE All-Share Total Return index7,7968,013 2.8%
FTSE AIM All-Share Total Return index1,0991,493 35.9%

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange

 

The bumper profit growth partly reflects the operational leverage of a business that benefits from a relatively low fixed cost base and a remuneration structure geared to performance. It also reflects the benefits of restructuring that cut £3m from the annualised fixed cost base. Cenkos’ first half underlying pre-tax profit of £2.8m is stated before a £1.1m charge for restructuring and staff share retention plans.

Shareholders are rightly getting their share of the spoils. Having hiked the 2020 pay-out by 17 per cent to 3.5p a share, the board has raised the interim dividend per share by 25 per cent to 1.25p at a cost of £0.7m. Since listing on Aim in December 2008, Cenkos has paid out 180.83p a share.

The 4.8 per cent rolling 12-month dividend yield aside, Cenkos retains a cash pile of £24m (42.4p a share) which backs up more than half of its £46m market capitalisation. This means that its operational business is effectively priced on five times the last 12 month’s pre-tax profit, a low rating for a broker that is well on course to report double-digit full-year profit progression.

The holding has produced a 54 per cent total return since I included the shares, at 56p, in my market-beating 2020 Bargain Shares portfolio, and I view the pull-back on profit taking from April’s 97p high as a repeat buying opportunity. My target price is 120p. Strong buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.