When stock markets get going after a slump, there’s a trickle-down effect that takes time to work its way through the system. Usually, somewhere in the midst of that trickle, a fountain begins to spew up from a gap in the floor. All of a sudden, the top firms find themselves in need of a fountain head to keep gushing.
So it is in the UK investment banking and advisory market right now. For a real-life example of such trend in action, look no further than gusher Cenkos Securities (LSE: CNKS). Compare the recent rise of this upstart to a dreadful year for top-tier bank, Barclays (LSE: BARC) (NYSE: BCS.US), and it’s easy to see how Cenkos makes for an attractive target for a competitor of pretty much any size bigger than itself.
A Simon Peter That’s Proving The Doubting Thomases Wrong
Last year, Cenkos posted interim profits of £23.5m – representing a 653% increase over the same period in the year before.
While impressive, many investors were a little weary of the results, since around half the company’s H114 revenue came from what looked like a one-time deal: the IPO of insurer AA. However, a round of mayhem in the financial sector mid-year, with Barclays, RBS and Lloyds getting slammed with big fines for mis-selling to their customers, compounded with a slow summer in equity issuances, meant that despite posting stellar profits and showing an increase of 164% in cash on its balance sheet, Cenkos was still trading for peanuts come the end of December.
Right now, Cenkos is selling for around 5x earnings, despite having proven that it can play in the major leagues with much more established competitors.
With a market cap of £115m, there’s simply no better value publicly listed financial services firm on the UK market right now. Let’s look at some of the most compelling facts for the advisor being deeply undervalued:
- For a start, there’s that famous AA IPO, which pretty much every analyst in the City wrote off as being overpriced initially. Since June, however, the insurer has jumped 36% in value and it still looks cheap after paying off debt. Unbelievably, AA is starting to look like an enviable client.
- Cenkos has also had a number of wins recently fundraising for its other clients, further showing the strength of its distribution power. In the second half of the year, the advisor raised £424.9 million. Those placements will produce an estimated £20-£25m income for that period.
- Accounting only for the income derived from private placements conducted in the third quarter of 2014 (estimated at £15m), Cenkos is still trading at a valuation of less than 10x earnings for the period! On top of that are broking and advisory fees, which add up to another 20% on top at least. Contrast this scenario with rivals such as Numis, where the same multiple for the period is – at its most generous – in the 40s, and it’s easy to see the recent value on offer.
Cheap … But Hardly Just Chips
Barclays looks like a firm with distinctly average pools of talent in dire need of reinvigorating their lacklustre and heavily institutionalised investment banking operation. In the past year, Barclays has posted a 16% decline, wiping out all its shareholder’s 5-year gains and making the stock a 15% money-loser for the period.
While Cenkos is up just 44% in the past 5 years, more than half of that has been earned in the past year alone. And the company is still a fraction of the price of any other comparable competitor!
Cenkos is exactly the kind of fountain head gushing from the spring with great management, a bulging client base and a healthy cash position that both firms need to look at to take part in what appears to be a return to exciting times for mid-cap stock issuance.
