Stock Pitch - FinnCap (LON:FCAP)

18th Aug '21 by Keelan Cooper

10 comments 4941 reads

finnCap was pitched to the Stockopedia Investment Club (SIC) on 10th August 2021 at a share price of 33.5p.

twOPb63yLzWXo0jQtpCFcksmrY5qW8VgnVruM7yeSGtu-5bwxmQQC92CqC2ZmQmcHJGoYJnv7maLyDXb6XE5MgiBEdRfqz5AyuWreFMvn2TJVr-nO7DaDsLWmiREHDRZTgndJo1M

Since the company’s IPO on the Alternative Investment Market (AIM) in December 2018, it has succeeded in aggressively growing its operations in the brokerage services and investment advisory industry, and taking market share. Despite its impressive growth over the last few years, the company still trades on a trailing price to earnings ratio of just 6.7x and hands out 4.69% annually to its shareholders in the form of dividends.

This raises some question marks around the low valuation, especially given the company’s historical growth record and future ambitions.

It seems that the market doesn’t believe that finnCap’s current tailwinds from the heightened levels of capital markets activity being seen around the world is sustainable. IPOs, Mergers & Acquisitions, Fundraisings, Investment & Debt advisory have all witnessed a tremendous rebound in activity since the pandemic lows of March 2020, and eventually appetite for these will somewhat subside.

After a strong start to the current year (FY 2022), it appears as though little of the current upside from the strong macro backdrop is priced in. Could finnCap’s share price rerate on the back of this, or is the market right to be wary of the cyclical nature of the company’s operations?

Bull points: Significant activity in capital markets (IPOs, placings, M&A, advisory), impressive growth and taking market share, excellent financial position to fund both organic & acquisitive growth, whilst simultaneously returning capital to its shareholders.

Bear points: Highly reliant on current market conditions continuing, results may have already peaked in the current cycle, poor share price momentum after what appears to be a case of ‘buy on the rumour sell on the news’.

Profile

About the stock:

AIM-listed finnCap (LON:FCAP) operates under the Financials sector, in the Investment Banking & Investment Services industry. The group is based in London, and currently focuses on providing most of its services in its core UK markets, but is growing its operations internationally.

At the current share price of 32p, the current market capitalisation is around £58.5 million. The shares are relatively illiquid, with an Exchange Market Size of 8k.

According to Stockopedia’s classification systems, finnCap is currently an Adventurous Small Cap Contrarian stock. The current trailing 12m price…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Momoko Miyamoto

18th Aug '21

I think the trailing P/E and historic divi yield is probably rather flattering as there was a lot of easy money made by brokers last year from capital raises. Looking ahead fees from M&A and IPOs may benefit from increasing activity but I prefer and hold Numis (LON:NUM) as the market leader. Catering to micro-caps is all very well but will these companies stay loyal to their broker as they grow larger and their requirements become more complex?

Keelan Cooper

Hi Momoko,

Thank you for raising some interesting points.

The P/E and dividend yield remain around their current levels when calculated on a 12m forecast basis, given the current estimates for FY2022. Given the strong start to the year, the FY2022 figures (which are slightly below FY2021) might end up being revised upwards as well.

Choosing between Finncap (LON:FCAP), Numis (LON:NUM) and Cenkos Securities (LON:CNKS) wasn't a straightforward decision. Each company has its merits, and I believe that UK-focused brokerages & investment advisors are valued quite attractively across the board at the moment, especially given the current market backdrop.

In my opinion, finnCap's strong growth over the last few years, combined with its future ambitions gives it the best chances for sustained earnings growth and multiple expansion, but I do think Numis could do quite well too!

Kind regards,

Keelan

Silver Moon

Hope you are right about Numis (LON:NUM) which I've held for a long time Keelan. I get the feeling my cash has been feeding its Directors all that time.

Silver

cmpeckham

"The Quality and Value Ranks stand out here, at 83 and 92 respectively."

... and their results are showing momentum too, all of which accounts for the relatively high stock rank. The problem is, this is all based on 1 year's (peak?) results which are unrepresentative of performance across the cycle. The investment club's rules for both buying and selling are based on stockranks and in general this is a good thing, but when it comes to assessing something so cyclical as this, it is probably more misleading than helpful.

There is a market saying that the right time to buy cyclical stocks is when they look expensive, not when they look cheap. There is a lot to be said for that. Equally, it could be said that the time to buy is when margins and returns on capital are poor and the quality rank is on the floor.

A decision on whether to buy or sell finnCap should really be based on your view of where we are in the cycle, not where it sits in the stockranks. In truth, it probably matters little whether you choose finnCap, Numis or Cenkos. Whether the trade works or not depends little on the specific stock and much more on how the cycle plays out.

Having said that, all this depends a great deal on your intended holding period. If your intended holding period is only a year then what I've said is largely irrelevant. Stockranks work (on average) over 1 year, even taking in to account their limitations regarding cyclical stocks. But I get the sense in these stock pitch write ups (which are a great addition to the site) that you are assessing stocks as long term holdings. In that case, the cycle is the key thing, not the stockrank, and the investment club rules become a bit unhelpful.

tommy2027

19th Aug '21

Excellent write up Keelan. The SIC stock pitches are another great addition to stockopedia. I really enjoy reading and learning how you analyse a stock. Very helpful to an amateur investor like myself. Keep up the good work.

Thanks, Tom

Peter171

A good analysis, but one thing not covered is the technical aspect of the price. It is bouncing along the 200 DMA and this would deter my decision in voting in favour of selection. I would want to see some positive upturn in the short term DMAs before considering a purchase.

Rusty2

Hi Keelan,
Certainly there is no lack of choice in that section with many having high Stockopedia rankings, you could add Jarvis Securities (LON:JIM) and Premier Miton (LON:PMI) as well. I have been considering both Finncap (LON:FCAP) and Jarvis Securities (LON:JIM) recently.

I will have look into Numis (LON:NUM).

David Tait

20th Aug '21

Finncap A very good analysis but the wrong conclusion. Terry Smith has made a great success out of clearly defining what are not investment grade businesses. The list is not endless and includes airlines and low margin activities such as supermarkets. It concentrates the mind wonderfully to the areas most likely to increase returns to investors. Corporate fiance is not such an area it is a highly leveraged bet on the market either a feast or a famine. Sitting between the investors and his return is a capricious talent poo l with a voracious appetite. Not for me

27th Aug '21

I note that Ergomed (LON:ERGO) share price has shot up about 20% since 16th August, also the Stockrank has gone up also, not sure why.

What did the club sell them for?

Interim results are out on 28th September.

jonkingston

Mark Simpson talks about why he invested in Finncap on this weeks Capital Employed Podcast, if it's of interest to shareholders -

https://podcasts.google.com/fe...

Stock Pitch - finnCap (LON:FCAP)

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Keelan Cooper

10 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...