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Capital Markets

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Categorized | Financial

Cenkos profits plunge as fundraising drops

Posted on September 21, 2016

Shares in Cenkos fell more than 18 per cent on Wednesday morning after the small-cap broker reported a 91 per cent plunge in pre-tax profits and a 71 per cent drop in revenues in the first half.

The company nevertheless insisted it was “pleased” it had eked out a £1.7m pre-tax profit for the six months to the end of June “despite a much reduced level of revenue”.

    Cenkos raised £529m on behalf of clients during the first half, a 74 per cent drop from the more than £2bn it raised for clients during the same period last year.

    Basic earnings per share plummeted 95 per cent, to 1.2p per share, and the company slashed its interim dividend by 86 per cent, to 1p per share.

    Cenkos pointed to a “tough market environment” — in which the UK vote to leave the EU in June and wider macroeconomic uncertainty had seen total funds raised by companies listed on the London Stock Exchange’s Aim junior market fall by 30 per cent, to £1.93bn, in the six-month period — to explain the poor performance.

    The company also warned that “increased uncertainty” remains in the equity markets following the result of the EU referendum, posing a “principal risk” to its business.

    However, Jim Durkin, chief executive, insisted Cenkos was “well-placed to benefit from improvements in market conditions” and had made a “good start” to the second half of the year.

    “There is institutional demand to fund high-quality companies and ideas and since July we have been engaged in relation to a number of significant fundraisings and our current pipeline is encouraging,” Mr Durkin said.

    Cenkos’ business model rests on the strength of its relationships with a handful of senior fund managers at large institutions, such as Lansdowne Partners, Woodford Investment Management and Invesco, which owns more than 14 per cent of the broker.

    The broker relies on a few key individuals, relatively low overheads and an “eat-what-you-kill” strategy that is highly-geared to performance. Its deal-driven approach means that it is more vulnerable to market downturns and does not have the same level of corporate retainer fees to rely on in more difficult times as its rivals, such as Numis.

    Small-cap brokers have been under substantial pressure in recent years, as intense competition, combined with a sharp drop in activity, has squeezed the sector. That pressure has driven consolidation in the sector. On Tuesday, stockbroker WH Ireland said it had sold a 23.1 per cent stake to the Kuwaiti European Holding Group for £8.45m.

    Wednesday’s disappointing results for Cenkos come just one month after the broker was fined £535,000 by the UK’s markets watchdog over its sponsorship of Quindell, the scandal-hit insurance claims processor and legal services company that became Watchstone.

    Cenkos was penalised by the Financial Conduct Authority for sloppy systems and controls around its sponsor services. In particular, the FCA took issue with Cenkos telling the regulator that one of its clients was eligible for a Premium Listing when it had not done enough research to ensure this was the case — a key element of a sponsor’s role.