• Mark Watson-Mitchell

Increased IPO’s and M&A activity makes two broking companies look well-placed and attractive

14th April 2021


Just in case you had not noticed The London Stock Exchange is blaring out that it has just recorded the best start to a year for more than a decade.


Loads of fat fees have been earned by the mega-brokers and financial houses as big new IPO’s are proclaimed on a weekly basis.


Twelve main market floats have raised a total of £5.2bn, while eight companies were floated on AIM in the same quarter, raising just over £441m.


Carry on regardless


Casting aside any exterior hassles like Covid-19, like Brexit, like a general economic collapse et al the market has just steamed away.


And there are said to be scores of companies just waiting for their chance to gain market entry, whether main or AIM. So, the good times are set to continue for a while yet.


Beware of ‘hairy’ valuations


But as I stated last week, I remain cautious of unjustified ratings and valuations being put on to some newcomers.


There used to be a time when brokers would only consider floating a company when it had sales and profitability that could attract investors, both professional and private.


Lessening of entry criteria


However, as times continue changing so too does the level of criteria used upon which to judge a business ahead of going public.


Nowadays it apparently is a judgement upon the basis of the business concerned and therefore its potential, if a massive wedge of money was thrown into its balance sheet by eager investors.


Changing listing rule criteria can be dangerous, if misapplied by heavyweight fearsome professionals. Deliveroo is a prime example of just what can go wrong if valuations are over pumped.


Increasing corporate activity


But on the other hand, the amount of straight forward mergers and acquisitions business being handled by a number of broking houses is definitely in the ascent.


Add that to the building list of smaller company IPO’s and you can perhaps sense that many in the broking community will be doing well this year.


Two broking companies to look at


Taking a scan of some quoted fee-earners has identified two broking houses offering upside potential – the £70m valued finnCap Group (LON:FCAP) and the much larger £415m Numis Corporation (LON:NUM).


finnCap Group


Apart from providing trading services to a broad range of institutional investors,finnCap provides financial services to growth companies both public and private.


It provides advisory, broking and research services to companies on AIM and on the London Stock Exchange Main Market.


The company also advises on mergers and acquisitions business.


It also arranges corporate debt as well as private company fundraisings.


Last three months alone the company handled a mass of fundraisings, as well as helping on new floats and increasing corporate activity.


Last Wednesday Chief Executive Sam Smith stated in a Trading Update that the group’s final quarter to end March had been stronger than expected. She inferred that total income for the last year was expected to be around £47.3m, up over 83% on the previous year.


Analyst Ian Poulter at Progressive Equity Research estimates that the last year could have seen adjusted pre-tax profits of £9.4m against £1.6m, with earnings leaping from 0.8p to 4.4p per share.


We will have to wait until early July to see the final results but in the meantime the group’s shares have been reflecting pleasure at Sam Smith’s comments that she is already seeing a healthy Q1 for the current year.


The shares, which were languishing at around the 23p level last Autumn, lifted up to 31p by the start of this month, since when they have peaked at 41.6p, before slipping back slightly to the current 40.5p.


Despite them almost being at their peak I have to say that I really do like the feel of this group and I consider that its shares will soon reflect the higher trading levels that it is now experiencing.


I set a 50p Target Price, which could be achieved before the finals are published.


Numis Corporation


The Numis Corporation, which is several times larger than finnCap, two weeks ago announced its Trading Update for the six months to end March.


This group is a leading independent investment banking operation that offers a full range of research, execution, corporate broking and advisory services to companies and their investors.


It has the largest client base by number of corporates in the UK and employs some 290 staff in its offices in London and New York.


The interim update suggested that the group is expected to report revenue in the region of £110m for the first half, showing growth of over 75% relative to the comparative period.


It will also be and comfortably ahead of the record performance in the second half of the company’s full 2020 year.


Numis will announce its half year results for the six-month period ending 31 March 2021 on 7 May 2021.


Analysts Andrew Mitchell and Martyn King at Edison Investment Research estimate that the current year to end September could well see the group’s revenue increase from £154.9m to £185m, with pre-tax profits increasing from £37.1m to £52.4m.


That could provide earnings of 36.7p (26.7p), more than easily covering the 12p per share of expected dividend.


The group’s shares, which were down to around the 220p level at this time last year, have since been edging higher and higher, recently peaking at 396p before easing back slightly to the current 386p – which is around the same price that they were in April 2006.


I believe that they offer some upside at the current price, with my Target Price now being set at 480p.

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