CNKS.L Regulatory News (CNKS)

8 September 2022

Cenkos Securities plc

Interim Results for the six months ended 30 June 2022

Cenkos Securities plc (the "Company" or "Cenkos" or the "Firm"), the independent institutional stockbroking firm, today announces its results for the six months ended 30 June 2022.

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.

(1) Underlying profit is disclosed before the impact of the day 1 value of options and warrants received in the period and the associated fair value gains and losses on the options and warrants held, restructuring costs and costs associated with incentive plans.

(2) Prior year comparatives have been restated to reflect the current definition of underlying profit.

Since being admitted to trading on AIM in 2006, the Company has returned £118.6 million of cash to shareholders, equivalent to 185.05p per share, before the payment of the proposed 2022 interim dividend of 1.0p per share.

Outlook

We have completed 3 transactions in the second half to date. However, market conditions remain challenging and are likely to be so for the foreseeable future. While we will continue to transact and pride ourselves on being able to operate in all market conditions, subdued transaction volumes are likely to persist. Our strong balance sheet, talented workforce and ability to get things done will help us continue to grow our client base and be the first choice for growing, innovative companies.

Julian Morse, Chief Executive Officer commented:

"The first half has provided challenging conditions in which to operate, resulting in lower revenues and underlying profit levels. Following a strong opening to the year, when we advised on two IPOs and one introduction to AIM, we have seen market activity slow dramatically across the remainder of the half due to the well documented macro-economic pressures. Despite soft market conditions, we continue to raise money for clients, increasing our market share and number of corporate clients while executing our strategy of building on our strengths and retaining a tight focus on what we do best. As a result we accounted for 23% of all the money raised on AIM in the half year.

More than ever, we see that stability and operational resilience will be critical qualities over the near term. We continue to operate with a very strong balance sheet, holding additional capital above regulatory minimums, and our variable remuneration structure allows us to maintain a disciplined approach to staff costs. We believe this provides us a flexible, resilient platform to deliver from as opportunities present themselves."

This announcement contains certain inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

Chairman's statement

The six months to 30 June 2022 has been a period of volatility and uncertainty. The year began with a focus on the speed of economic recovery from COVID-19 and its associated lockdowns, but the Russian invasion of Ukraine in February dramatically changed the global outlook.

The second quarter of the financial year bore the full brunt of the market's reaction to the war in Ukraine, the disruption to supply chains and the consequent rises in commodity and energy prices leading to a surge in inflation. This occurred at a time when financial markets across the globe were already anticipating tighter monetary conditions, as the financial support provided by governments and central banks to deal with COVID-19, was being withdrawn.

The combination of substantial and unforeseen rises in energy costs and consumer prices, together with rising interest rates, has created a volatile and challenging period for the UK stock market. Sentiment has been the powerful driving force behind the market's decline but as we enter the corporate reporting season, there may be some grounds for optimism. The financial results of quality UK growth companies, with decent operating margins and strong earnings potential, have the potential to turn investors' attention back to valuing such companies on fundamentals.

Whilst no-one foresaw the war in Ukraine, as I reported in my last statement, we did anticipate 2022 would be a more challenging year than 2021 which enjoyed the benefits of the COVID-19 bounce. Our business model, based on maintaining a low fixed cost base and a strong balance sheet, stands us in good stead to weather the current slowdown in market activity and to be in a strong position to harness every business opportunity. This is demonstrated by the fact that Cenkos accounted for 23% of all funds raised on AIM in the first six months of 2022, which is also testament to the hard work and quality of the team we have assembled at Cenkos.

At Cenkos, growth companies and investment trusts are our focus and we continue to work with innovative companies to fuel their development, through IPO and beyond.

Lisa Gordon

Non-Executive Chairman

7 September 2022

Chief Executive Officer's statement

The year to date has provided challenging conditions in which to operate, resulting in lower revenues and underlying profit levels. Following a strong opening to the year, we have seen market activity slow dramatically across the remainder of the first half due to the well documented pressures in the macro-economic environment. This has resulted in the amounts raised on the AIM and Main markets in H1 2022 being at their lowest levels in over decade. Against a subdued backdrop, however, we see opportunity and reasons for positivity.

Even when the market is soft, we continue to transact, increase our market share and execute our strategy of building on our strengths and retaining a tight focus on what we do best. With this emphasis, we have successfully delivered two of the eight IPOs on AIM so far this year and one introduction. In H1 2022, Cenkos accounted for 23% of all monies raised on AIM and represented 49% of all new money raised from AIM IPOs. In times like these, the quality of our offering and people shines through and builds on our reputation as a broker that continues to produce successful transactions whatever the market conditions. We believe that concentrating on providing high service levels and clear communication to clients will continue to set Cenkos apart. We have helped a number of clients in their M&A journeys and while we lose a client if they are acquired, it is pleasing that we have seen a net rise in client levels so far during 2022. This underlines Cenkos' ethos of partnering with our clients, both new and existing, for the long term, across market cycles. I would like to thank all of our employees for their continued drive and determination in delivering this.

The increased volatility and uncertainty in the markets in 2022 has also impacted our figures as non-cash 'other operating expenses' have increased related to the decrease in the mark to model value of warrants and options that we own. More than ever, we see that stability and operational resilience will be requisite qualities over the near term. We continue to operate with a very strong balance sheet, holding additional capital above regulatory minimums. Combined with a disciplined approach to costs, we believe this provides a flexible, resilient platform to deliver from as opportunities present themselves.

The uncertainty seen in the markets during the first half of 2022 is likely to remain a feature of markets for a while, but UK small caps look exceptionally oversold and have the ability to bounce back far more quickly than the rest of the market. With the energy displayed by our employees and our resilient operating model, we are well positioned to take advantage of any improvements in sentiment.

At Cenkos, we look ahead to continuing to build long-term partnerships and proactively finding solutions in all markets to make Cenkos the first choice for growing, innovative companies.

Performance

Revenue generated in H1 2022 decreased by 30% to £12.7 million (H1 2021: £18.2 million) while underlying profit decreased by 29% to £1.9 million (H1 2021: £2.7 million). A summary of H1 2022 performance compared to H1 2021 is set out in the table below. The comparative figures have been restated to reflect the current definition of underlying profit. In the current period, in addition to adjusting for restructuring costs and costs associated with incentive plans, this is disclosed before the impact of the day one value of options and warrants received in the period and the associated fair value gains and losses on the options and warrants held. The Directors believe this provides a clearer view of the operational performance of the business in the period as their lifespan may overlap several periods before crystallisation. During this time, their value in the financial statements is marked-to-model and highly volatile, subject to changes in the share price, although vesting criteria may not have been, or indeed may never be, reached.

Comparative figures for H1 2020 and H1 2019 have also been included to show the progress made and positive impact of the 2019 restructuring on the cost base and underlying profit.

Corporate finance

Corporate finance fees decreased by 32% to £8.7 million (H1 2021: £12.7 million) reflecting a decrease in the level of corporate activity across the market following the invasion of Ukraine by Russia, the impact of inflationary pressure and looming recession. Cenkos completed 9 (H1 2021: 16) placing transactions helping its clients raise £0.38 billion (H1 2021: £0.58 billion) in equity finance. Of this, £0.31 billion (H1 2021: £0.40 billion) was raised on the AIM market which equates to 23% (H1 2021: 10%) of the £1.32 billion (H1 2021: £3.96 billion) raised by companies during the period to 30 June 2022.

Nomad, broking and research

Nomad, broking and research retainer fees and commission increased by 4% to £3.2 million (H1 2021: £3.1 million) resulting from the increase in the number of clients represented by Cenkos to 103 at the end of June 2022 (June 2021: 100).

Execution

Net trading gains decreased by 66% to £0.8 million (H1 2021: £2.4 million) against a backdrop of the war in Ukraine and inflationary pressure leading to a fall in asset values. During this period, we maintained a top 5 market share in 84% (H1 2021: 90%) of our clients' stocks and overall made markets in 184 (H1 2021: 219) equities.

Administrative expenses

Administrative expenses - staff costs

Staff costs decreased by 40% to £7.1 million (H1 2021: £11.8 million) primarily due to a decrease in the accrual for variable remuneration in line with overall performance, which was partially offset by costs associated with a targeted increase in staff to 102 employees at 30 June 2022 (June 2021: 92) from 94 at 31 December 2021. This is in-line with Cenkos' aim to recruit ahead of the curve, so it can continue to provide a premium service to its clients as the business grows.

Administrative expenses - other

Other administrative expenses remained largely flat at £3.5 million (H1 2021: £3.6 million) reflecting continued tight control over the cost base offset by considered investment.

Other operating expense

Other operating expense includes the fair value gains and losses on options and warrants. During H1 2022, the mark to model value of these instruments has fallen dramatically following the decrease in value of the underlying shares to show a loss of £1.9m (H1 2021: £0.04 million).

Administrative expenses - restructuring costs and Incentive Plans (STIP, LTIP & CSOP)

Costs associated with the restructuring and incentive plans decreased by 41% to £0.6 million (H1 2021: £1.1 million). The current period costs related almost entirely to the charges associated with the Short Term Incentive Plan ("STIP"), the Long Term Incentive Plan ("LTIP") and Company Share Option Plan ("CSOP") incentive schemes. The latter two schemes were launched in May 2021 and run again in April 2022, aimed at retaining and incentivizing staff, with the LTIP focused on senior management and the CSOP all employees. The charge of £0.6 million (H1 2021: £0.6 million) in respect of these plans represents the portion of the fair value of the schemes allocated to this period.

Profit and earnings per share

Underlying profit decreased by 29% to £1.9 million (H1 2021: £2.7 million).

A loss before tax of £0.5 million was generated for the period (H1 2021: profit before tax of £1.7 million) along with a tax credit of £0.1 million (H1 2021: tax charge of £0.2 million) resulting in a loss after tax of £0.4 million (H1 2021: profit after tax of £1.5 million).

Basic earnings per share for the period was -0.8p (H1 2021: 3.1p).

Financial position

The statement of financial position shows net assets decreased to £23.7 million as at 30 June 2022 (30 June 2021: £25.4 million), which reflects the loss in the period, the cost of shares acquired by the EBT and dividends paid being partially offset by the credit to equity for share based incentive plans.

The increase in non-current assets relates mainly to the recognition of the lease of new offices in Edinburgh being partially offset by the amortization of the right-of-use asset in respect of the London and Edinburgh office leases. This has a corresponding impact on trade and other payables.

The increase in net trading investments is mainly due to the activity over the period. The decrease in trade and other receivables reflects the settlement of share trades, while the decrease in trade and other payables reflects the settlement of share trades and payment of 2021 year-end bonus being partially offset by the movement on lease liabilities.

The decrease in cash and cash equivalents reflects the payment of 2021 year-end bonus, payment of the 2021 final dividend and acquisition of own shares.

Capital and Liquidity

The Board continuously assesses the Company's cash and capital requirements with the intention of maintaining a strong balance sheet, including a significant surplus over and above its regulatory requirements and sufficient liquid resources to cover at least 12 months of fixed overheads.

At 30 June 2022, Cenkos had capital resources of £23.6 million (H1 2021: £24.5 million) comfortably ahead of its regulatory capital requirement.

EBT share purchase plan

The Company intends to make a recommendation to Zedra Trust Company (Guernsey) Limited ("Zedra" or the "Trustee") which administers the EBT and currently has a trading plan (the "EBT Share Purchase Plan") in place with the Company, to meet the servicing of the Company's share schemes and share plans, to reduce the maximum value of ordinary shares in the Company to be purchased from £300,000 per month to £50,000 per month. Zedra has absolute discretion and independence in respect of all trading decisions it may make in respect of the purchase of ordinary shares of the Company pursuant to the EBT Share Purchase Plan.

Going concern

Russia's invasion of Ukraine and the continuing conflict has impacted world markets and investor sentiment. Aside from the humanitarian crisis within the country, the war has also disrupted global supply chains including supplies of grain, gas and oil. With markets just starting to recover from the impact of restrictions to contain the spread of COVID-19, this has sent inflation to record levels and many countries into recession. While not directly impacted by the war or the global sanctions which continue to be applied to entities and individuals connected with the Russian Federation, Cenkos is reliant on the health of financial markets and investor sentiment. However, even under these conditions, Cenkos is still able to complete transactions, although it has resulted in a reduction in fees generated from placing and corporate finance and a decline in fair values of listed equities, options and warrants. Management has performed an impact analysis as part of its going concern assessment using information available to the date of issue of these financial statements. Having performed this analysis, management believes: (a) regulatory capital requirements will continue to be met; (b) the Company has sufficient liquidity to meet its liabilities for the next 12 months; and (c) that the preparation of the financial statements on a going concern basis remains appropriate as the Company expects to be able to meet its obligations as and when they fall due for the foreseeable future.

Outlook

We have completed 3 transactions in the second half to date. However, market conditions remain challenging and are likely to be so for the foreseeable future. While we will continue to transact and pride ourselves on being able to operate in all market conditions, subdued transaction volumes are likely to persist. Our strong balance sheet, talented workforce and ability to get things done will help us continue to grow our client base and be the first choice for growing, innovative companies.

Dividend

The Board recognises the importance of dividends to our shareholders, and since being admitted to AIM we have returned the equivalent of 185.05p per share of cash to shareholders.

The Board will continue to look to return significant value to shareholders while seeking to establish a level of consistency of dividend payments throughout variable market conditions.

The Board declared an interim dividend of 1.0p (H1 2021: 1.25p) per share. The dividend will be paid on 11 November 2022 to all shareholders on the register at 14 October 2022.

Julian Morse

Chief Executive Officer

7 September 2022

Condensed income statement

For the six months ended 30 June 2022

Condensed statement of comprehensive income

For the six months ended 30 June 2022

Condensed statement of financial position

As at 30 June 2022

The financial statements were approved by the Board of Directors and authorised for issue on 7 September 2022.

Julian Morse

Chief Executive Officer

7 September 2022

Registered number: 05210733

Condensed cash flow statement

For the six months ended 30 June 2022

Condensed statement of changes in equity

For the six months ended 30 June 2022

Equity attributable to equity holders

Notes to the financial statements

1. Accounting policies

General information

The interim condensed financial statements of Cenkos Securities plc (the "Company" or "Cenkos") for the six months ended 30 June 2022 are unaudited and were approved by the Board of Directors for issue on 7 September 2022.

The Company is incorporated in England under the Companies Act 2006 (company registration No. 05210733) and its shares are publicly traded. The Company'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 UK-adopted International Accounting Standards 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.

Critical accounting policies and key sources of estimation uncertainty

The judgements and assumptions considered to be the most important to the portrayal of the Company's financial condition are those relating to equity-settled share-based payments, valuation of derivative financial assets and revenue recognition. These significant accounting judgements and key sources of estimation uncertainty are described on page 69 of the Cenkos Securities plc's 2021 Annual Report and Accounts. In addition to this, to the extent that derivative financial assets are traded, reference is made to recent bargains in estimating the fair value of these financial assets. The Directors consider that this reflects fair consideration for the services provided.

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

Where appropriate prior year figures have been restated to conform to the current year presentation.

Basis of accounting

The interim condensed financial statements for the six months ended 30 June 2022 have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting. The interim condensed financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements for the year ended 31 December 2021.

The accounting policies adopted in the preparation of the interim condensed financial statements are consistent with those followed in the preparation of the Company's annual financial statements for the year ended 31 December 2021.

The financial information contained in these interim condensed financial statements does not constitute the Company'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 2021 does not constitute the statutory accounts for that financial period. Those accounts have been reported on by the Company's auditors, BDO 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 Company'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 Company, its cash flows and liquidity position are set out in the Strategic Report in the Company's Annual Report for the year ended 31 December 2021.

In light of internal forecasts and the current pipeline of transactions, the Directors are satisfied that the Company 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.

Russia's invasion of Ukraine and the continuing conflict has impacted world markets and investor sentiment. Aside from the humanitarian crisis within the country, the war has also disrupted global supply chains including supplies of grain, gas and oil. With markets just starting to recover from the impact of restrictions to contain the spread of COVID-19, this has sent inflation to record levels and many countries into recession. While not directly impacted by the war or the global sanctions which continue to be applied to entities and individuals connected with the Russian Federation, Cenkos is reliant on the health of financial markets and investor sentiment. However, even under these conditions, Cenkos is still able to complete transactions, although it has resulted in a reduction in fees generated from placing and corporate finance and a decline in fair values of listed equities, options and warrants.

Cenkos' current pipeline is encouraging and we continue to win new clients. A cessation of the conflict in Ukraine and easing of supply chains could lead to more favourable market conditions, which in turn could lead to an increase in corporate finance activity. Whilst it is not possible to quantify the overall impact of the events, as described above, if current market conditions were to continue, then this would in turn suppress the level of corporate activity and fees generated from placing and corporate finance and lead to a further decline in fair values of listed equities, options and warrants.

In order to mitigate the risk associated with fluctuations in the financial markets, the Company operates a flexible business model which links risk adjusted variable remuneration to corporate performance. Fixed costs are kept low and controlled. Cenkos is not reliant on external borrowings but is funded entirely by share capital and retained earnings. The business is not capitally intensive. The trading book is tightly controlled by book limits and, apart from shares received in lieu of fees, is held for market making purposes or to facilitate client business. Cenkos has a positive cash cycle and does not run any liquidity mismatches. Cash is the largest asset on the statement of financial position and consequently its exposure to credit risk is largely due to its bank deposits before risk weighting.

Management continues to monitor the impact of the war in Ukraine on the Company and the financial markets.

Management has performed an impact analysis as part of its going concern assessment using information available to the date of issue of these financial statements. As part of this analysis, a number of adverse scenarios have been modelled to assess the potential impact on the Company's revenue streams, in particular corporate finance fees, and on asset values, liquidity and capital adequacy. In addition, a reverse stress test has been modelled to assess the stresses the balance sheet has to endure before there is a breach of the relevant regulatory capital requirement or insufficient cash resources and including an assessment of any relevant mitigations management has within their control to implement. Having performed this analysis, management believes: (a) regulatory capital requirements will continue to be met; (b) the Company has sufficient liquidity to meet its liabilities for the next 12 months; and (c) that the preparation of the financial statements on a going concern basis remains appropriate as the Company expects to be able to meet its obligations as and when they fall due for the foreseeable future.

New and amended standards

New and amended standards and Interpretations issued by the IASB that will apply for the first time in the next annual financial statements are not expected to impact the Company as they are either not relevant to the Company's activities or require accounting which is consistent with the Company's current accounting policies.

2. Dividends

Amounts recognised as distributions to equity holders in the year:

The interim dividend for 30 June 2022 of 1.0p (30 June 2021: 1.25p) per share was approved by the Board on 7 September 2022 and has not been included as a liability as at 30 June 2022. The dividend will be payable on 11 November 2022 to all shareholders on the register on 14 October 2022.

3. Events after the reporting period

There were no material events to report on that occurred between 30 June 2022 and the date at which the Directors signed the Interim Report.