Cavendish (LSE:CAV) — Preliminary results for the year ended 31 March 2021

0:01 Good afternoon, ladies and gentlemen, and welcome to the FinGap Preliminary Results for the Year Ended 03/31/2021 Investor Presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just please simply type in your question and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, we'll review all company questions submitted today and publish responses where it's appropriate to do so. These will be available via your investment company dashboard, and we will notify you by email

0:32 when they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. And if you would give that your kind attention, just please simply just click yes, no, or, that'd be great. And I'd now like to hand over to Sam Smith, CEO from FinCap. Good afternoon, Ji Smith. Sam? Thank you very much. Good afternoon, and thanks, everyone, for joining us. I am Sam Smith, CEO of the FinCap Group. And I'm joined by Richard Snow, who's our CFO, who joined us in May 2020. So if I start off with a presentation, what we've really been trying to build at FinCap Group since our IPO in December 18 is a financial advisory business. Before that, we had just a broking business, a small mid cap equities.

1:17 And very much since our IPO when we bought CAVENDISH corporate finance, we've morphed into a financial advisory business that's got more than just a broking leg. It's got an m and a leg, and we've built other services since then. So that's really why we've delivered the results we have today. It's been a combination of very strong capital markets, but also because of the the wide variety of services and products we now have as a group and all of those delivering this year. So if we look at this year, we completed 76 transactions in the period and that compares with 61 deals we closed last year. So not a huge increase in deals, but what has changed is the deal fees coming from those deals. Last year, it was 16,000,000 of deal fees.

2:02 This year, 3,000,000 of deal fees. And that's been partly the market, but partly the increase in market cap of clients we now act for. On the ECM side, obviously, markets have been very strong. We raised £725,000,000 for our listed clients and we had 13% market share in all AIM fundraisings over £5,000,000 and we closed four IPOs in the period. M and A side continue to be busy, five public m and A transactions and 11 private with an aggregate value of 600,000,000. And then our debt team, which we started expanding just after our IPO in December 18, has closed nine transactions in the year. So that's a new investment for us. And that team have generated over £1,000,000 of revenue for the first time, raising 124,000,000 for clients.

2:53 So record results and exceptional operating environment. Total income £47,600,000 up 84% year on year. Adjusted PBT £9,600,000 up over six times our last year number. And adjusted EPS the same, up six times last year at 4.8 4.8 p. Our cash 20,400,000 and that's really important to note that cash figure. Last year it was 4.7. Having a strong balance sheet is really important as build out a financial advisory group. We now have that cash and that cash even post paying out the year end bonus is still sitting at 17,200,000 as of yesterday. So as we hit half one and we started to think the market was continuing to be strong, we started to invest in our business and that's across all areas. So we invested in the ECM side, hiring into sales, corporate breaking, and more recently market making and trading.

3:50 We've broadened our sector experience in M and A, which is crucial that we've become sector specialists to continue to win good quality size work. So we've invested in human capital technology and the consumer franchise, key areas for us, key sectors. We've also a key USP as we get to know the broadest range of investors for our clients. So we launched family office coverage and alternative capital coverage in November last year. And we also put together a think analytics team that started trading and generating revenue in April 2021. And they're dealing with hedge funds and larger institutions. We've also invested in an origination team, which now we are multi product. We can have a team that are selling all the group services to those entrepreneurs.

4:38 And that's already that investment in the team has already led to deals closing and monetizing that. So very strong year of investment. We hope those will build returns next year and year after. And that meant dividends this year, we have now declared a full year dividend of 1.5p

4:54 and we've committed on the back of our strong cash balance and first half trading to pay at least 1.6p for next year full year 2022. We had a good start to half one. Q1 revenue this year is up on Q1 last year. There's a solid pipeline and we expect full year 2022 revenue to be in the range 40,000,000 to £50,000,000 So I'm going to hand over now to Richard Snow, our CFO, to talk about some of the detailed financials. Richard? Thank you, Sam. Just turning over to Slide five, where I've summarized the business performance. Revenue up 79%. The number you'll have read in today's press release, up 84%, includes the gain from the sale we made of a small stake we took in primary bid some years ago, which changed hands and was bought by the London Stock Exchange.

5:46 Our equity capital markets business up 84%, and our m and a business up 66%. And I'll look at the divisional performance in a moment. Employee compensation, which is the biggest driver in any professional advisory firm, was 59% of revenue, which for those of you who study the sector, we'll see that's very much in line with big names like Numis. Comp was, of course, much higher this year. Bonus was zero last year, but that very much was, reflected by the huge increase in revenue. Now at FinCap, we run our business pretty lean. Nonemployee costs, as I call them, increased by 6% on an underlying basis, and I'll explain that later. But our, nonemployee cost per head were extremely competitive again compared to our peers.

6:35 PBT up six fold, adjusted EPS up six fold, and cash up four fold. The The detailed p and l is set out on the next page. And to just highlight for those who look through it and want to understand, we've got a big increase in finance interest. That is not, debt. That is because of the IFRS treatment of our new offices under the IFRS 16 standard that we've taken on during this year. And those looking back to the interim results will see the liability and interest associated with that at the half year. In terms of exceptional costs, there really weren't any in h two. These were primarily the costs of running two businesses sorry, two premises in parallel the first half of last year and a small restructuring we did really dealing with the last end of the CAVENDISH merger. The tax rate the effective tax rate was a little lower at 16%.

7:29 We'd tell you to expect normally 20%, and that was because there were some permanent timing differences related to the big fit out spend we had in our new offices. Divisional performance, as I said to you, in capital markets, the retainer income, for those of you who don't know the sector, many of our clients pay us an annual retainer fee in order for them to act as their broker or their nomad if they're on AIM. They remain stable, very much in line with our stable client base. Trading and research had an excellent year, as you can see, at 6,800,000 versus 3,600,000. And that reflects liquidity from retail investors, like many of the audience here who've been involved in the market. But also the fact that as we deal with bigger companies, bigger market values and liquidity, there is more opportunities to earn commission and to to, you know, gain profit from trading those companies.

8:24 Fundraisings and advisory, enormous increases. Sam will talk about in a moment. Our m and a business, 12,100,000. That is the second highest level of revenue that what was CAVENDISH that the group acquired in 2018 has recorded as an annual income. So great outcome, very concentrated into q four, very driven there by people doing deals, but using tax planning and having to close off there. Next page, just running through the cash generation. What's driven this big increase from 4,700,000 to 24,400,000?

9:00 Well, fundamentally, a very strong and profitable year. You'll see the PBT of 8,400,000 versus the prior year of 1,200,000. There's a big working capital inflow. You'll all understand that in the city that we pay annual bonuses based on people's performance. None were paid in for FY '20, but we had quite a significant accrual. They all get paid post year end. So with it within that 7,000,000, but not obviously all of it, was a big chunk of payment to both employees and the tax man related to year end compensation. The final bits for you to understand in our cash flow, we did take out a loan for about 1,600,000 from NatWest to pay for the fit out that we did in our new offices, which brings the two bits of the businesses together, and Sam will talk out in a minute. Dividends were down on last year because we didn't pay a final dividend last year. We didn't pay bonuses to employees either. Obviously, we've shown you with our dividend commitment today that we're gonna do something about that and positively for shareholders.

10:01 Current cash, £17,200,000. So the business current trading has been ahead of last year in q one. It's received about 700,000 for the primary bid stake, and, of course, it's paid out bonuses. So the cash position is is good, slightly down on on March 21. Next page, just a bit on costs. The overall message was that they were up around 6% on the prior year. That's driven by the fact that we have a more expensive property, predominantly because we've got some significant space to expand and grow the business into. We did not have any prem any room in our previous premises. Trading and IT costs were a bit higher than we expected because revenue was too. There's obviously a variable element to trading shares on behalf of clients.

10:50 And, you know, we did have lower marketing and travel costs because everyone was locked up in marketing using Zoom, effectively as we are doing today. Guidance for next year, we expect these nonstaff costs to be about £10,000,000. Now that compares with £9,300,000 last year. The big driver of that in FY '22 is having a full year of our new property. I'm also hoping that people will be able to get out and market and meet clients again, and that obviously will be increasing. But, you know, there, we're talking about small hundreds of thousands of pounds of expense. Right. Summary, current trading. Sam's put it pretty well. Q one is ahead of last year, 6%, that kind of level, but good to be given that last year was such a strong year. Pipeline is good, particularly in the m and a team where we've exchanged on five deals in q one, which will close in q two. And so that's a nice, chunk of revenue to know that is coming into the firm.

11:50 Outlook, I've summarized. Sam said 40 to 50,000,000 revenue. That'll be very much driven by the strength of the equity markets, imagine, Sam. Staff costs right in the middle of the industry range, circa 60% of revenue, and non staff costs at around £10,000,000. So that's it on the finances. I'll hand back to you, Sam, to talk about the operations and strategy. So in operations, firstly, looking at the capital market side of the business, which is the public markets area. The revenues there on retainers are strong and stable income stream for us. What's really important is that it's relatively stable on the the actual retainer figure, but the average market cap of client has moved moved up up considerably and that now stands at $134,000,000 average market cap of our corporate client, which obviously drives secondary and fees.

12:41 We've built $34,500,000 out of our Capital Markets division, up 84%. That compares to 18.7% last year and it's the first time that our Capital Markets division has gone over $20,000,000 of deal fees. We raised 13% of fundraisers over $5,000,000 I've said that on AIM. It's an important stat. And what's also important is 725,000,000 we raised for clients. Over 500 of that came from the tech and life sciences franchise, which are two key sectors we've been in for the whole time since our n b a fourteen years and before that. So they're strong sectors for us, which we think will continue to deliver. So very strong trading period for our secondary commissions on the back of retail interest and also being in good quality stocks.

13:30 If you look at the next slide, our new clients we've taken on, we've won 15 clients in the period. We continue to win clients. They were an average market cap of GBP 60,000,000 at the point of take on. As at today, those 15 clients stand at an average market cap of 161,000,000. So we are taking on bigger clients, but we're also moving those clients up and taking on the right clients that are delivering. And that's the most important thing for our model, taking on more of the right client and focus on quality. On the ThinkCavenger side, you look there, the retainers are really new deals that come in that sign up an initial small retainer when we sign them. And generally, those get closed twelve to eighteen months later. So you can see in Q3 a real spike in sign ups, which come through in revenue twelve to eighteen months post that.

14:19 The success fees all really came in Q4. Q1, Q2, Q3 very quiet. Q4 very busy with the potential changes to CGT being rumored, but that's actually really continued ever since. The pipeline's been building. We are working on better quality deals all the time. We closed 11 deals in the period and the average fee was $9.84 k, which was higher than it's ever been at CAVENDISH. So really strong performance from Q4 and we hope that continues and we expect that to continue. On the next slide, the strategic progress. This is sort of setting out how we are seeing ourselves now as a financial advisory group. If think of the small cap, mid cap broking piece, which is where we've been for a long time out of our fourteen year history since MBO, that all sits on the left hand side there under ECM.

15:10 So that's our core business, but that is now becoming a smaller part of the whole as we expand it to becoming financial advisory. So ECM still sits there. We still want to grow it. We want to really, build our IPO track record. This year our IPOs from 2020 are up 71% in terms of share price performance, and we were 12% oversubscribed on our deals. So that's what we need to continue to do, have a good track record in IPOs that we can build on and also keep winning the right corporate client. The m and a advisory piece second in there from the left, that's all about building that turnover up to around the 20,000,000 level. When we bought CAVENDISH, it was sitting at around 10. It hit 12,000,000 last year and we expect it to exceed that this year. And that's all really driven about the deal completion rate. When we bought CAVENDISH, it was running a completion rate of deals that it took on of around 55% which is fairly low. In the industry. We want to drive that up to 80% and we have quality of deals now we're taking on where we think that is a very realistic outcome.

16:19 So an average fee we want to have 500 ks and above on all those deals we sign up. So very exciting on the m and a side. The other piece of the puzzle is dealing with PE and trying to get PE to give us buy side work. And that started to happen now since we recruited a PE coverage team eighteen months ago. That's finally coming through and we are now working on four or five buy side mandates for PE. The debt team I talked about before closed nine deals in the period, revenue over £1,000,000 now and they've already closed five deals in Q1 twenty twenty two. So we'll continue to invest in that team and that work is a mixture of debt for PLC clients, for private clients and for PE. So a mixture of the three, generally quite small tickets but lots of them. It's a more volume game in debt.

17:08 Private growth cap, still our intention to become the go to house for private fundraisings in The UK. We are covering family offices now with a hire we made from someone who left Rothschild back in November. We poached them. We are hiring again into that team and we really want to build market share in not just the GBP 2,000,000 to GBP 20,000,000 fundraisers for private businesses, but also the GBP 20,000,000 to GBP 100,000,000 Series B and C tech deals. So we are starting to work on a few of those. PLC strategic advisory. This is an important area we've been in for a while, but it's probably not well known what we do in it. It's a very technical area. It's all about the code. Last year, we did one in five of all PLC deals under 500,000,000, which is second only to Rothschild. So we punch well above our weight in PLC strategic advisory, and we are looking to grow that area going forward.

18:01 And then over on the right hand side, think someone asked a question earlier about acquisitions and where do they sit in the growth plan. This is the part where you can see how we're trying to grow. So as well as growing all those individual five parts to make a proper financial advisory group servicing growth

18:17 companies, we also want to add other products and services servicing that same growth company, potentially more recurring income, which moves away from the very cyclical nature and the very lumpy nature of fees from m and a and ECM and building in more consultancy revenues. So we are looking at things like ESG consultancies at the moment to add, which will probably be by acquiring. We will be selective. We are looking at lots of things at the moment. There's nothing that we have found specifically right now, but that is our intention. And particularly with our balance sheet now, we're in a much better position to go and do that. So that's where that's a a five year view, if there's an investor on the call today and they're looking at us, five year view, if if you got that extra piece to 20% of revenue, 20% of revenue, would that be about the right level?

19:09 I'm trying to think of the contribution. Your aim is to get to a £100,000,000 revenue business and that we would be looking at no more than £20,000,000 of that revenue coming from something new, whether it's organic new teams or acquisitions. 80,000,000 we think the growth is coming from those five on the left hand side by just continuing to hire good people and work with the right clients. And then the next slide really looks at the investment that we've made this year. What we've been very good at over the last fourteen years is investing in new areas, having ideas, finding the right people, setting things up, and making those work and producing good margins. And that's what's driven our growth. So last year's investments centered around m and a with HR, human capital, UK m and a, the debt business where we hired people, and the private equity side. So you'll see there those are deals that have not only been signed up when we've hired people, but they've also been closed and that represents around £5,000,000 of revenue, some of which fell in 2021, some of which will fall in 2022.

20:16 So it just shows the return that's coming through already from the investment we made last year. ESG, there was also a question I think was the first one on WWG. So I'll address that here as well. There there are a few things around ESG. Think out when it set out when we did the NBO fourteen years ago. Everything for us was about doing the right thing. We've always felt that shareholder returns are extremely important, but equally as important is our team, our clients, our suppliers, and our community. And that now that is ESG, but that's what we've done, since we've been in existence. So we think because of our creds in this space, we should own this space and lead it in financial services, which is what we're intending to do. And how have we started that? Well, in September, we launched the FinCap ESG scorecard, which is a 15 question very easy guide for small, mid, but quoted businesses to start reporting on ESG.

21:15 And it just helps them to start to help investors interpret what they're doing on ESG. We then partnered in December with WWG, which is a technology platform that can report quite easily on your ESG metrics. We use it ourselves as FinCap, and we have made a small investment of £150,000 in them to help roll that out to our clients. So we have offered that free to all our clients for the first year to get them up and running to report start reporting on ESG effectively. So we're quite excited about that, and we will lead the charge and continue to lead the charge on ESG reporting. For ourselves, we are certified carbon neutral, and our community impact projects have always been surrounding education and entrepreneurship.

22:01 And we've been putting entrepreneurship in primary schools for a long time. We added secondary schools this year and partnered with a organization called Your Game Plan. They've put entrepreneurship in the curriculum that was actually launched today, into over a thousand schools. And we've also launched the side hustle which is a project to get 14 to 18 year olds entering a competition with their side hustle where we give them money to help set up a business. So that's very important to us and social impact is key. Yeah. And there's a lot of smaller things going on in our firm.

22:35 Our computers, when they reach the end of our life, are going into the Obviously, wiped and cleaned, that's where they go. I've got colleagues in the sales desk who do in class teaching English as a second language. So there's a lot of this going on. She's almost invisible to the outside world alongside these these big initiatives. So in summary, a record performance driven by the fact that we're now a financial advisory group, not just a broker. That's really important. So the capital then second we'll

23:14 half half year. And investment we've made into it. So adjusted we'll PBT and EPS both up over six times from last year. We've still invested in the business with that underlying PBT inclusive investment we've made, which we expect to come through this year and the following five years. Lots of new areas. The key things with our USP are very broad investor coverage, so family offices, hedge funds, larger institutions, and our our broad small mid cap offering, plus investment into m and a to be sector specialists. It's It's very very key we become a sector specialist to win work from PE, which is now happening and FinCAT analytics starting to trade in April.

23:59 So current trading, I'll repeat again, we've said a couple of times that full year 2022 started well, good pipeline of deals. We're targeting revenue £40,000,000 to £50,000,000 for the year 2022. We obviously need to be continued strong equity markets, but the M and A side is looking to be really strong this year. 1.5 p total dividend this year with a commitment of at least 1.6 next year. And everything is about our cash balance now. We haven't ever had this amount cash. This really enables us to go for it for the next five years to have options about acquisitions, to have a sustainable dividend policy and to really enter the big league and pitch against some of the bigger brokers. I think one of the questions again I've just seen coming through is how is the competitive market?

24:48 It is competitive. It's always been competitive. I don't think it's any more competitive than it ever has been. But this level of cash really helps us compete, do different things, hire different people, and really accelerate our growth over the next five years. So that's the presentations and I think we might That's move great on Sam. To Q and A. Over to Mark. Sam, Richard, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. We just want the company to take a few moments to review investor questions submitted already. I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A, can be accessed via your Investor Meet company dashboard. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations.

25:41 Sam, Richard, I know you've kind of gone through the Q and A in part as you've gone through the slides. But if I could just hand back to you and perhaps just ask you, Richard, if you could, to read out the questions and who they're from and give a response where it's appropriate. So perhaps, Sam, I'll take the first question from Gilbert e regarding cash on the balance sheet because I think it's a really good question. The firm, when I joined it about fourteen months ago, had £5,000,000 on the balance sheet. And given the economic conditions and given how business was trending, they had to cancel its dividend, not pay any bonuses, although there was a bonus pot for f y '20, and ask the staff, the entire team, to take at least a 50% pay cut.

26:28 That isn't the way that you operate a public company. And if you look at a company like Numis, it has a £100,000,000 on its balance sheet. We don't need anywhere near this. But it was very clear to me as CFO, and Sam totally, you know, agrees with me here, that 5,000,000 was the wrong number. And after long consideration, we think we need to have a at least a £10,000,000 cushion in the bank. Now because of the way the bonuses get paid and dividends get paid, none of those deductions, corporation tax from last year, are currently in the 17,000,000 you see for q one. So our current underlying cash is somewhat above £10,000,000, but not enormously so. And I think although we did really did a perfect storm last year with Brexit sorry, FY '20 Brexit, the weak equity markets around the election, it shows that this business needs to have a reasonable cash cushion. And I think that there will be m and a opportunities.

27:22 My view, you could disagree with me. Our rating is too low to be using significant equity, and it will be good if we can use cash. So, Sam, I think that that's a reasonable answer to that first question from Gilbert. Should I go back and answer the question about research? And then I'll Yes. If you could. One as well. Yes. Good. Because I can't answer that question. Yeah. What do we think about making research available? Well, we obviously think it's hugely important because we were the first broker to make our research available to all retail investors. We think our job as a corporate broker is to do the right thing for our client, which means getting as many investors and a broad range of investor on the on the list as possible. And you can't do that by restricting your research. So we absolutely think it's fundamental. We know not everyone does it. We don't think that's the right thing, and we're very supportive of it, and that's what we do.

28:10 So I totally agree with you there. So hopefully that's answered your question. Please come back if not. M and A opportunities. So we're very much I mean, we constantly look at our area, which everyone would, but I think our preference has always been to sit on the sidelines of consolidation within the breaking space. They're notoriously very difficult to do. Mostly one plus one equals less than one. They are culturally very difficult to merge. There are so many issues with them, and we think we grow very well organically. We've shown that over fourteen years. We have got more exciting opportunities in growth sectors where they will have strong cultures that fit with us, that don't distract management time to a massive degree. So I think our our view is very much sit on the sidelines and, watch someone else do it if they want to and then take on the clients and the people. So clients and the people, absolutely, but the businesses, that's something that we'll probably leave to someone else. Yes, Sam. So I think in a word, unlikely.

29:15 Yes. Right. Shall I just grab the next question? Because, again, very reasonable. With q one, 40 to 50,000,000, for Marcus. The revenue range looks conservative to him. And given that you expect CAVENDISH to exceed 12,000,000 this year, are we being too cautious? And I think in reality, when you look at the 40 to 50,000,000 and you look at last year, what will be key to deliver at the upper end of that range? Strong equity markets, the ability to get the IPOs that we have in the hopper done. They're not easy. They're big binary fee events. Obviously, if they happen, they're good, and we like doing them. And and the team here, I think, is very good at doing them. At the lower end of the equity markets are weaker, and we find less issuance. I think the lower end is reasonable. And you have to accept that we've just gone through a year where we've done a number of what you'd really call COVID related financings and made good money. You look at one of my favorites, Revolution Bars. It's a great product. It had to shut because of lockdown.

30:13 We moved it down into AIM, and we refinanced the company with great investor support. I'm hoping that Revolution Bars reopens and shines, and it won't need to do another COVID relation financing. So you've gotta get a little bit of balance in terms of guidance, and we'll obviously update you as we go through the year with how things work. So I think we're being perfectly reasonable, and it's a realistic range, but I appreciate you think it looks cautious. On the last question there on the size of a listing, so that's obviously going up and up all the time. And we would now say unless you're 50,000,000 market cap capable of just justified that with a with a proper multiple on your profit figure, then you shouldn't even really be looking at IPO. So 50,000,000 market cap, probably absolute lowest.

31:00 Would asset management be part of our corporate strategy? Very unlikely. Again, it's something we've looked at every year. Should we be in asset management? I think it's a scale game. I think we're much more about strategic advice. I think advice is where we want to be to growth companies. So I think very unlikely to be in asset management. Yeah. They're very expensive. Marcus, the final question, revenue recognition. It's pretty simple. The fees are recognized when the general meeting approves and the deal, you know, the deal settles. That's when we recognize revenue. There are rare cases where there's, in the engagement letter, a work fee or a document fee, which is when the document is published. Usually, it all happens when the actual equity is raised. I hope that answers that question.

31:47 Okay. Richard, as you just kindly highlighted, that takes care of every question that's been sent in. And thank you so much for those people that have sent in those questions. And thank you, Sam and Richard, for responding. And perhaps, Sam, I could just hand back to you just for a few closing comments. We have no further questions. And then I will redirect investors to provide you feedback. Yes. Thanks very much. So I'll just leave it at closing comments as it's been our best year ever. That's been great. It's been driven by being a multiproduct financial advisory group, and we are servicing growth companies, but we are absolutely product agnostic. And now we have all the different service offerings with an origination team. We can approach these entrepreneurs to give them absolutely the right advice, and that's where we want to be. Giving them the right advice and having integrity and doing it in a way where we have a culture that is doing the right thing and promoting ESG, with now a strong balance sheet to go and do more exciting things.

32:43 That's brilliant. Sorry, Richard. Was driving Perfect. To Well, thank you very much indeed both to Richard and Sam once again for updating investors this evening. Could I please ask investors to close this session as you'll now be automatically redirected for the opportunity to provide feedback in order that management can better understand your views and expectations? This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of FinCap Group PLC, we'd like to thank you very much for attending today's presentation. That now concludes the session, and good afternoon to you all.