Psychologically, it can be hard to entertain the prospect of buying shares in a company when they’ve fallen a long way, even when the outlook is positive. And we’re presented with just such a dilemma with Numis Corporation (LSE: NUM) today.
The investment banking outfit provides research, execution, corporate broking and advisory services to companies in the UK and their investors. The recent weakness in the wider stock market has been unkind to the shares, and I think financial services firms like this tend to exaggerate stock market movements.
Investing to grow
On top of that, Numis delivered a profit warning recently caused by extra recruitment costs. The company is building up its payroll with additional talent, with the aim of pursuing growth opportunities – arguably that’s the best kind of profit warning. However, the reality is that the share price is down around 36% in just three months – painful if you’ve been holding the stock. But what about now? Is it time to buy?
In today’s full-year report, the firm explained that the benefits of the investment it made in the business during 2018 “are now materialising.” The directors point to three new corporate clients won since the start of the current trading year in October, and said that growing the corporate client list underpins their confidence in the firm’s future prospects.
But the company’s activities in the Equity Capital Markets (ECM) have been challenging since October because of the stock market declines, which particularly affected “mid-market growth stocks.” The new trading year has started quite well with 14 deals, “including three IPOs,” but that’s a decline in deal volumes compared to the equivalent period last year.
However, the directors sound upbeat about the outlook, saying that activity levels “remain high across the business.”And the pipeline is “strong” with IPOs, and capital raisings planned for corporate clients, although “the execution of these transactions is increasingly unpredictable.”
The rise in volatility has hit the equity side of the business too, and the firm achieved lower trading profits and institutional income during the first two months of the year than it did in last year’s equivalent period. But Numis thinks it can gain further market share regardless of the market environment.
Big ambitions
Numis reported record revenues today for the trading year to September, although that’s immaterial to the outlook. What matters is what the firm does next, and there’s a clue in the dividend decision — the directors held the full-year dividend at the previous year’s level, suggesting a cautious view on the outlook.
However, Alex Ham and Ross Mitchison, the co-chief executive officers, said in the report that Numis aims to build “the investment bank of a generation,” which sounds like a lofty ambition. They reckon that the investment in people that affected profitability during the year has strengthened the firm’s “competitive position, expanded the range of services available to our clients and enhanced the overall quality of the Numis platform.”
Meanwhile, the current share price close to 275p values the company at a forward earnings multiple for 2019 just below 11, and the forward dividend yield is around 4.4%. I’m tempted to take a chance on the growth prospects of the firm at this depressed share-price level.
