CNKS.L Regulatory News (CNKS)

18 September 2018

Cenkos Securities plc

Interim Results for the six months ended 30 June 2018

Cenkos Securities plc (the "Company" or "Cenkos") and together with its subsidiaries (the "Group" or the "Firm"), today announces its results for the six months ended 30 June 2018. Cenkos is an independent, specialist institutional securities group, focused on small and mid-cap companies and investment funds. The Group's principal activity is institutional stockbroking.

Cenkos' shares are admitted to trading on the AIM Market of the London Stock Exchange ("LSE"). The Company is authorised and regulated by the Financial Conduct Authority ("FCA") and is a member of the LSE.

Financial highlights

Chief Executive's Statement

Following my appointment as Chief Executive in August 2017, we have focused on our core business, closing our Singapore office, and are in the process of acquiring a team of Nomad advisers from Smith and Williamson. A strategic review of our front and back office capabilities has been started together with a review of the markets we serve. The exercise, initiated in Q3 2017, was undertaken in the context of the introduction of the Market Abuse Regulations (MAR), MiFiD II, the Criminal Finances Act (CFA), the General Data Protection Regulation (GDPR) and, of course, with the Senior Managers and Certification Regime (SM&CR) on the horizon. Our Board recognises the increasing complexity of the financial markets and the demands, correctly, placed upon us by our customers, regulators and the public. The strategic reviews sought to put in place appropriate front and back office structures with systems and controls to provide good client outcomes in a way that can be clearly demonstrated. The costs associated with transforming Cenkos are included below under administrative expenses. The two-year transition program of refreshing our brand values; focusing on strengthening our core competencies; and undertaking opportunistic acquisitions to complement our core business is well under way.

Interim management report

Performance

Revenues of £18.1m in the first half of 2018 have been disappointing compared to the same time last year (£29.2m) and our internal targets. There are several reasons for this:

· Cenkos, predominantly, earns commission and corporate finance fees from primary and secondary fund raisings. The 2017 first half results benefited from revenues of £10.6m from a single client transaction whilst in 2018 the highest value transaction was £2.4m. This difference accounted for much of the shortfall.

· Transaction rates were slow in Q1 2018 but have begun to gather pace in Q2 2018.

A summary of the revenue streams in H1 2018 v H1 2017 is set out below:

Corporate finance

Corporate finance fees decreased by 44% to £11.9 million (H1 2017: £21.2 million) as a number of transactions which were expected to complete in the first half slipped in to the second half and the 2017 first half results benefited from revenues of £10.6 million from a single client transaction.

During H1 2018, we completed 15 transactions (H1 2017: 19 transactions) of which 3 were IPOs (H1 2017: 2 IPOs) and raised £666 million (H1 2017: £982 million) for our corporate and investment trust clients. Deals of note which completed during the period include the secondary raisings of £170 million for Breedon Group plc and £51.5 million for Restore plc.

Nomad and broking

Nomad and broking retainer fees were flat at £2.6 million (H1 2017: £2.6 million).

As at 30 June 2018, Cenkos' client base was made up of 116 (H1 2017: 120) companies and investment trusts of which 80 (H1 2017: 73) were clients whose shares were admitted to trading on the AIM market and 36 (H1 2017: 42) clients were main market listed.

We remain ranked as one of the leading brokers in London for growth companies, as demonstrated by Adviser Rankings Limited's July 2018 'AIM Adviser Rankings Guide' where we were ranked number 2 Nominated Adviser by total number of AIM clients and for 'Consumer Goods' clients. We were also ranked first for 'Consumer Services' by number of clients and first for 'Industrials' clients by both number of clients and client market capitalisation.

Research

Research fees and commission decreased by 12% to £1.5 million (H1 2017: £1.7 million) following the roll out of MiFID II which came into effect from 3 January 2018, requiring the unbundling of research and commission payments. There remains a level of uncertainty in the market as the full impact of the legislation affects product offerings and pricing models, however we produce research covering 130 companies and 8 sectors and since the beginning of the year 57 institutional clients have signed up to take this research.

Execution

Execution gains decreased by 43% to £2.1 million (H1 2017: £3.7 million) largely due to gains made on shares and options in lieu of fees in 2017.

Administrative expenses

Administrative expenses of £17.7m in H1 2018 have decreased by almost a third from £24.7m in H1 2017. Staff costs make up over 70% of the cost base and within this, discretionary performance-related pay is a significant part. The significant levels of discretionary performance-related pay, having fallen, highlights the resilience of the Cenkos' business model and its capacity to withstand market and other shocks.

Front office staff costs, before discretionary performance-related pay, have fallen by over 15% in H1 2018 compared to the same period last year reflecting the actions taken from the front office review. Front office discretionary performance-related pay has fallen sharply, reflecting lower revenues.

Back office staff costs, before discretionary performance-related pay, rose by 7% in H1 2018 over the same period in 2017, reflecting investment in senior management (with pay structures less oriented to bonuses based upon revenues), a revised three lines of defence compliance model and investment in project management capability to deliver the various statutory and regulatory initiatives such as CFA, GDPR and SM&CR in addition to various internal projects. The investment in these areas have led to significant reductions in other non-staff-related administrative expenses, where efficiencies have more than off-set this investment through the period.

Other administrative expenses have fallen from £5.5m to £4.7m just over 14% reflecting lower use of regulatory and other consultancies to deliver day to day compliance, legal and project work.

Profit and Earnings per share

Profit before tax on continuing operations decreased by 90% to £0.5 million (H1 2017: £4.6 million) and profit after tax on continuing and discontinued operations decreased by 90% to £0.3 million (H1 2017: £3.3 million). Our basic earnings per share ("EPS") on continuing and discontinued operations decreased by 90% to 0.6p (H1 2017: 6.1p).

Financial position

The consolidated statement of financial position shows a fall in the net assets to £26.3m as at 30 June 2018 from £27.7m as at 30 June 2017. This is due, mainly, to a reduction in net trading investments resulting from the sale of shares received in lieu of fees, an increase in trade and other receivables reflecting the movement in trade and client receivables, a fall in trade and other payables reflecting a lower accrual for performance related pay and an increase in cash.

The increase in cash resulted from the net cash inflow from operating activities due to profits generated and the movements in working capital being partially offset by dividends paid and the acquisition of own shares into treasury and by the Cenkos Securities plc Employee Benefit Trust ('EBT').

Dividend and capital

Cenkos' dividend policy as stated in the 2017 Annual Report is to use earnings and cash flow to underpin shareholder returns through a combination of dividend payments and share buy backs into treasury. Our goal is to pay a stable ordinary dividend, reinvest in the firm and return excess cash to shareholders subject to capital and liquidity requirements and the prevailing market conditions and outlook. As at 30 June 2018, Cenkos had a capital resources surplus of £12.0 million (30 June 2017: £7.8 million) above the pillar 1 regulatory capital requirements reflecting retained earnings from the prior year.

The Board proposes an interim dividend of 2.0p per share. The payment of this interim dividend will trigger payments to staff under the CAP of £0.2 million in H2 2018 (H2 2017: £0.5 million). The dividend will be paid on 2 November 2018 to all shareholders on the register at 5 October 2018.

Acquisition of the Nomad business of Smith & Williamson

As previously announced, Cenkos has entered into an agreement to acquire the Nominated Adviser and Corporate Broker business of Smith & Williamson. The transaction is expected to complete by November 2018, following the undertaking of due diligence on existing clients of the Business which may transfer as part of the transaction. As a result of the acquisition, a team of 6 will join Cenkos' Corporate Finance department with effect from completion of the transaction.

Outlook

We have made a good start to the second half of the year with several transactions announced in July and August and more to come later in the year and beyond.

Responsibility statement

We confirm that to the best of our knowledge:

a) The condensed set of financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of Cenkos Securities plc and the undertakings included in the consolidation taken as a whole as at 30 June 2018; and

b) The interim management report includes a fair review of the development and performance of the business and the position of Cenkos Securities plc and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that the Group faces.

Forward-looking statements

These financial statements contain forward-looking statements with respect to the financial condition, results, operations and businesses of Cenkos Securities plc. Although the Group believes that the expectations reflected in these forward- looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Such statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by forward-looking statements and forecasts. Forward-looking statements and forecasts are based on the Directors' current view and information known to them at the date of this statement. The Directors do not make any undertaking to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Anthony Hotson

Chief Executive Officer

18 September 2018

Condensed consolidated income statement for the six months ended 30 June 2018

Condensed consolidated statement of comprehensive income

for the six months ended 30 June 2018

Condensed consolidated statement of financial position as at 30 June 2018

Condensed consolidated cash flow statement for the six months ended 30 June 2018

Condensed consolidated statement of changes in equity for the six months ended 30 June 2018

Notes to the condensed consolidated financial statements

1. Accounting policies

General information

The interim condensed consolidated financial statements of Cenkos Securities plc (the "Company" or "Cenkos") together with its subsidiaries (the "Group") for the six months ended 30 June 2018 are unaudited and were approved by the Board of Directors for issue on 17 September 2018.

The Company is incorporated in England under the Companies Act 2006 (company registration No. 05210733) and its shares are publicly traded. The Group's principal activity is as an institutional stockbroker to UK small and mid- cap companies and investment funds. These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Company operates.

The preparation of financial statements in conformity with International Financial Reporting Standards ("IFRS") as adopted by the European Union requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those of estimates.

These financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments.

Prior year comparatives have been amended to conform to the presentation in the current period due to the treatment of discontinued operations as required by IFRS 5 in the consolidated income statement.

Basis of accounting

The interim condensed consolidated financial statements for the six months ended 30 June 2018 have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2017.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2017 except for the adoption of new standards in the period as mentioned below. These financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

The financial information contained in these interim condensed consolidated financial statements does not constitute the Group's statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative information contained in this report for the year ended 31 December 2017 does not constitute the statutory accounts for that financial period. Those accounts have been reported on by the Company's auditors Ernst & Young LLP and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Going concern

The Group's business activities, together with the factors likely to affect its future development and performance, its principal risks and uncertainties, the financial position of the Group, its cash flows and liquidity position are set out in the Strategic Report in the Group's Annual Report for the year ended 31 December 2017.

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, the Directors continue to adopt a going concern basis in preparing the interim financial statements.

2. Dividends

3.  Events after the reporting period

On 1 August 2018 Cenkos entered into an agreement to acquire the Nominated Adviser and Corporate Broker business of Smith and Williamson. Under the terms of the agreement, Cenkos has agreed to pay Smith and Williamson deferred consideration equal to 20% of all corporate finance fees earned by the business from existing clients transferring to Cenkos during the 12 months following completion, capped to a maximum amount of £2m. Apart from this, there were no material events to report on that occurred between 30 June 2018 and the date at which the Directors signed this Interim Report.

4.  Market abuse regulation (MAR) disclosure

Certain information contained in this announcement would have been deemed to be inside information for the purposes of article 7 of Regulation (EU) No 596/2014 until the release of this announcement.