Increased IPO business and M&A activity is good news for these brokerages

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. These two brokerages are in the front line.

Loads of fat fees have been earned by the mega-brokers and financial houses as big new IPOs are proclaimed on an almost 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 Brexit, Covid-19, a general economic collapse etc, 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 Market 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 the unjustified ratings and valuations being put on 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.

Relaxation of entry criteria

However, as times continue changing, so too does the level of criteria used to judge a business ahead of going public. It seems to be getting relaxed.

Nowadays, it apparently is a judgement upon the basis of the business idea concerned and therefore its potential, especially if a massive wedge of money was thrown into its balance sheet by eager investors – what could it do then?

Changing listing rule criteria can be dangerous, particularly if misapplied by fearsome heavyweight professionals. 

Deliveroo is a prime example of just what can go wrong if valuations are over pumped. Accusations continue that the offering was overpriced and badly timed, given the company’s loss-making model.

On Monday I was interested to note a newspaper comment from John Roberts, the boss of AO World. His advice to companies like Deliveroo… “be careful what you wish for. If you are still building and developing a business, be careful taking it to market because they don’t like uncertainty that comes with entrepreneurship. And they value certainty.”

Is he looking at what I am looking at? Has he not seen the SPAC valuations?

Increasing corporate activity

But on the other hand, I have to say that the amount of straight forward mergers and acquisitions business that is currently being handled by a number of broking houses is definitely on the ascent.

Add that to the growing number of smaller company IPOs, and you can perhaps sense that many in the broking community, big and small, will be doing well this year.

Two broking companies with upside

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 £410m Numis Corporation (LON:NUM).

finnCap Group – 40.25p TP 50p

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, and it arranges corporate debt as well as private company fundraisings.  

Over the last three months alone the company has handled a mass of fundraisings, as well as helping with 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, which could be 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 after the update, before slipping back slightly to the current 40.25p.

Despite the shares 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 – 380p TP 480p

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 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 380p – which is around the same price that they were way back in April 2006.

However, I believe that they do offer investors some upside at the current price, with my target price now being set at 480p.