Cenkos Securities (CNKS:LN)

Cenkos Securities is a company I came across a while ago and have just added to my portfolio. I was attracted to its strong returns on capital of 20-40% and cash generative business (free cash flow has been roughly equal to net profit over the last 6 years). It also has a consistent record of returning all the cash it generates to shareholders (yes, all of it) via dividends and share buybacks. Since it listed in 2006, it has returned over £105m to shareholders (well over the current market cap of £64m). So is it going out of business, or struggling? No. It has net cash of £17m and another £20m in short term investments. The company has never made a loss and doesn’t look like it ever will due to the nature of the business. It is only at a P/E of around 10 (from a base of modest earnings) and with a forecast dividend yield of almost 10% this year.

Background

Cenkos Securities is a UK-based independent securities company. The Company’s principal activity is institutional stockbroking. Cenkos provides corporate finance, corporate broking, research and execution services to small and mid-cap growth companies, and others, across a range of industries as well as investment funds.

The chart below shows their revenues and profits over the last 10 years.

As you can see, revenues are very lump yet the company has never made a loss. This is because most of its costs are related to staff, and have a very high performance related pay component. So when the company doesn’t do well, the staff only receive basic salaries (still more than sufficient though!)

The average net profit over the last 6 years is £10m, yet the market cap is £64m. If you take off £14m of its net cash to make that a round £50m ex-cash, that puts it at 5x its long run average earnings. So the question is, can the company have more successful years like 2011-2016 again in the future? I think it can, and what’s more, if it has another stagnant period such as 2008-2011, it still earned roughly £5m per year which makes the current market price already reflective of the fact.

Risks

There are a couple of risks I see. First is the general equity markets, which is largely beyond the company’s control and foresight. The second is reputation risk. The company addresses this in the following excerpt from the last interim statement.

“We remain ranked as one of the leading brokers in London for growth companies, as demonstrated by Adviser Rankings Limited’s July 2017 ‘AIM Adviser Rankings Guide’ where we were ranked number 2 Nominated Adviser by number of AIM clients. We were also ranked top Nominated Adviser for ‘Oil and Gas’ and ‘Industrials’ (by client market capitalisation), number 2 Nominated Advisor for ‘Consumer Goods’ and ‘Consumer Services’ (by number of clients) and number 3 Nominated Adviser for ‘Technology’ companies (by number of AIM clients). The size of our corporate client base (where the Company is retained as Nominated Adviser / broker and / or financial adviser) rose slightly to 120 at 30 June 2017 (H1 2016: 119). This includes 33 main market listed investment trust and 9 main market listed corporate clients.”

So things look quite positive. But I can’t go on without referring to one blotch in its recent history however, regarding Quindell. In 2016, Cenkos was fined due to its failing to do due diligence to uncover the Quindell scandal when the company planned to switch from AIM to the LSE main market. You can read more on the scandal here. Needless to say there was some reputation damage.

Balance Sheet

This is very healthy and contains £20m in cash and another £20m in short term investments. The latter is used for their market making, so isn’t distributable to shareholders hence shouldn’t be netted out of the market cap. I do however think a lot of the cash can be netted out.

Share based compensation is becoming an ever larger part of the income statement which makes me uneasy, but most of the options available are exercisable far above the current share price. The effect is hard to gauge due to the vast share repurchases over the last 10 years.

Conclusion

While the company isn’t perfect, it has the most important factors I look for, strong cash generation and it distributes the cash to shareholders (dividend yield 5.4% and share count reducing at a compounded rate of 5% per annum). I think there is a good margin of safety at current levels should the company earn only modest returns for the next few years. I’ve made it a 4% position in my portfolio.

Disclosure: Author is long CNKS:LN

Investing Sidekick

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.