SMALL CAP SHARE IDEAS: Cenkos Securities

‘We are very good in difficult markets because we can still raise money for corporate clients,’ says Julian Morse, chief executive of Cenkos Securities.

Morse’s comments will reassure the 100 or so growth companies that retain the group’s services, particularly as we head into a more volatile period for equity markets.

For those unfamiliar with Cenkos, it acts as adviser, sponsor, and broker to companies mainly admitted to trading on AIM, the London Stock Exchange’s junior bourse, though it has a strong list of main market listed businesses, mainly investment companies.

SMALL CAP SHARE IDEAS: Cenkos Securities

Around two-thirds of Cenkos’ turnover comes from corporate finance

While it provides share trading, research and advisory services, around two-thirds of its turnover comes from corporate finance – in other words tapping the capital markets on behalf of clients.

It is not alone in having benefited from the upsurge in stock market listings and secondary share issues that have characterised the revival of fundraising activity during the pandemic.

The ability to maintain access to capital during the tougher times will mark Cenkos out from the pack moving forward, Morse’s opening comments suggest.

The key to being able to keep the taps running, the Cenkos CEO explains, is the way the group interacts with its investor base.

Effectively, Cenkos spends a lot of time upfront on the discovery process – which is City-speak for finding out just how much institutions will put up and at what price.

If that valuation is acceptable to the client, the process gets underway.

This pre-screening is why Cenkos has never had a failed IPO, or fundraising, Morse points out.

‘If you concentrate on your service level [with clients] and keeping that up, and investors continue to get decent returns, you are creating a virtuous circle,’ he adds.

As part of its corporate finance activity, Cenkos acts as nominated advisor, or Nomad, for 60 companies on the junior market, ensuring that the clients are advised appropriately and can comply with all the rules of AIM.

This has, over the years, required significant investment in personnel, systems and controls, which are now sunk costs.

‘We have the capacity, which is a big advantage; it’s a barrier to entry,’ says Morse.

‘The set-up requires a lot of money and time. To get approved by the regulator takes even more time.’

Cenkos’ service-oriented approach marks it out from many of its competitors.

So, the company provides the full suite of broking services and advice along with research, which is part of the after-market support.

‘We make a virtue out of having a high number of client-facing employees per client to provide the high service levels we pride ourselves on,’ says Morse.

Stock market listings: Cenkos has never had a failed IPO, or fundraising, its boss said

Stock market listings: Cenkos has never had a failed IPO, or fundraising, its boss said

An example of where this approach has worked to great effect is Marlowe, a client that has expanded via a series of nearly 70 acquisitions.

Cenkos, which is Nomad and joint-broker to the fast-growing services and software specialist, has been integral to its capital markets strategy.

It was lead bookrunner to the £130million share placing used to fund Marlowe’s latest and largest purchase – Optima Health – in January.

In fact, it has supported its stock market evolution from cash shell in 2015 to a business worth £850million today.

Because Cenkos is targeting ambitious growth companies, it knows that in any given year 30 per cent-40 per cent of its client base will be looking to raise money.

‘That number is remarkably consistent,’ Morse reveals, meaning the company can count on a ‘significant base’ of repeat revenue.

The Cenkos CEO says there is a ‘natural churn’ in its client base – for example to M&A. However, this is more than replaced by IPO activity and, in the past year, Cenkos has also secured eight new clients from competitors.

Going forward, it expects to see significant top-line and market share growth.

Analysts point out that Cenkos is operationally geared, which means any additional revenue will likely to drop largely unfettered to the bottom line.

Yet an enterprise multiple of just 4.8-times suggests the market is yet to factor the fundamentals of a business that posted underlying profit growth of 44 per cent in the first six months of the financial year (to June 30, 2021) on turnover up by 37 per cent.

If that is a problem for the current investor base, it is also an opportunity for those new to the story.

It is interesting to note too that a share incentive scheme Cenkos has put in place means all its staff will have skin in the game too.

It also means that everyone within the business is aligned with and alive to investor expectations.

A strong cash position means Cenkos can afford to pay out a dividend that gives the shares a near-5 per cent yield, which will definitely appeal to income investors.

Looking ahead, Morse does expect an upswing in market volatility, a view which appears to have been borne out by the recent gyrations seen on both sides of the Atlantic.

‘Things will polarise, so good quality companies will do well,’ the Cenkos CEO says of the current ructions.

‘Good quality companies are always looking for capital, and access to this capital is something I think we can provide for those good quality companies.’

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