sound underlying performance

Dowgate Capital are Advisers and Brokers to small companies with most of their clients being AIM listed companies. This month we are featuring Nominated Advisers (Nomads) in our ‘Meet the Players’ series. Therefore, we felt it would be interesting to also take a look at one of these Nomads as an investment opportunity. Dowgate Capital is a fairly small group and only has a market capitalisation today of approximately £4 million, but the group has considerable potential.

Dowgate, named after a water gate in the old London Wall (see footnote), are an interesting and progressive group. However, with a depressed AIM market, their share price has fallen from a peak of 28p in 2006 to around 10p today. We suspect that many investors would consider any company so tied into the fortunes of AIM to be very high risk. However, Dowgate has many ‘safety features’ for investors and is weathering these ‘challenging’ conditions rather well.  We believe that serious long term investors will find some interest in this company. 

I met with Tony Rawlinson the Chairman of Dowgate at their recently acquired London offices in Worship Street, not all that far from the site of the original Dow Gate. Tony spoke of some of the challenges of the current market conditions. However, he emphasised that the business is still profitable, has a strong balance sheet, and is very well positioned for when conditions do improve. We will consider these future prospects later, but firstly I will briefly cover the group’s history.

Dowgate History

The company first listed on AIM as Abinger Investments in 2001 following a placing at 30p* per share. Later that year the company acquired corporate finance advisory company, City Financial Associates Limited, (‘CFA’) with a further placing at 30p* per share and changed its name to CFA Capital Group Plc. Tony Rawlinson joined the business at this stage as Joint Managing director of CFA.

 The company continued to trade as CFA Capital Group until 2005 when it was renamed Dowgate Capital. It was at this point that Tony Rawlinson became Chief Executive. In 2006 the company bought stockbroker, Seymour Pierce Ellis (Ellis) in a deal valued at £4.65 million. At that time Dowgate raised £2.55 million in a placing at 19.5p* per share. Ellis were described at the time as ‘a private client agency stockbroker that also specialises in the provision of corporate broking services to AIM and PLUS traded companies’.

 *In April 2007 the company effected a 1 for 30 consolidation of its shares. We have quoted the pre 2007 placing prices in ‘New Money’ i.e. at 30 times the original value.

Finally, to complete the build up of the company, in March this year Dowgate recruited Dru Edmonstone and Philip Dumas to jointly head up a City Corporate broking team. These appointments are significant as, by bringing such well known and respected people, it will enable the Group to raise money from institutional investors and also will raise the profile of the group. As part of this arrangement, Dru and Philip will be issued with up to 8.3 million new Dowgate shares over a two year period – equivalent to approximately 15% of Dowgate’s existing share capital.

The Businesses

The resultant Group today has two businesses – Dowgate Capital Advisers Limited (DCA) and Dowgate Capital Stockbrokers Limited (DCS), with the latter Stockbroking business including the Ellis stockbrokers business and the recently acquired City based corporate broking team. We will refer to the two businesses as Advisers and Stockbrokers.

It is common for AIM companies to have one company to be both their Nomad and Broker and hence many corporate clients of Dowgate are clients of both of their businesses. Most of the costs of both businesses are covered by corporate retainer income. However, in addition the businesses earn transaction fees and commission.

The retainer incomes are the fees paid by small listed companies to retain the services of a Nomad and Stockbroker. Advisers have 47 retained clients and Stockbrokers have 59 retained clients.

In addition to corporate work, Stockbrokers runs a Private Client Stockbroking service with approximately 1500 clients. If you are looking for a broker who specialises in smaller companies you can read about the Dowgate service here http://www.dowgatecapitalstockbrokers.co.uk/clients.html .

We have described the business of Dowgate’s Advisers business in our article on Nomads – click here to read this article.

Interim Results

In the Interim results issued on 18 September Dowgate reported a ‘sound underlying performance’ from each of their businesses, with each group making a small profit before holding company costs and the cost of the new City broking team. An exceptional non-cash set up cost of £496,000 and overhead costs from running the new team of £244,000 resulted in a pre-tax loss for the half-year of £584,000.

Hence, without the new team the company would still be profitable even in the challenging conditions that we see today. I asked Tony Rawlinson if he had any regrets about bringing in the new high profile team. Tony explained that already the presence of these people is having a positive impact on all of the businesses. Whilst the new team has yet to secure any major deals, Tony pointed out that it is still early days for the team and that, by the nature of this business, a very small number of deals could quickly transform the Group’s profitability.

Looking further at the Interim results the Group’s total revenue declined by 18% compared to the same period in 2007. Operating costs, excluding those of the City team, were also down 10%. In such a business as Dowgate’s, costs will reduce with falling revenues due to the high percentage of income that is paid as commission or bonuses. Encouragingly, both in the Advisers and Stockbrokers businesses, retainer income remained steady at the Interim stage.

At the interims the group reported net cash of over £1 million pounds and a reduced, but still respectable, interim dividend of 0.2p per share was declared. 

The table below of recent results puts the Interim results into perspective.

* Includes exceptional costs of £605k

** ‘Forecast ‘Headline Earnings’

Equity Development (ED) issued a new research note after the recent interims. This can be accessed at www.equity-development.co.uk  - free registration required. ED have reduced their forecast for the current year to take account of the current economic climate – forecast earnings per share are 0.53p per share, with improvement expected in 2009.

Downtrend

The decline in the fortunes of AIM and the stock market in general has had its impact on Dowgate’s share price. The share has been in a steady downtrend since 2006.

Like many AIM companies, the share has been treated harshly by the market. For, whilst Dowgate’s business has declined somewhat, the group does have the following of ‘defensive qualities’ which should be attractive to long term investors:-

• Strong balance sheet
• High percentage of retainer incomes
• A relatively low level of fixed costs
• An active share buy-back programme
• A Dividend forecast to be 0.5p this year

Prospects

Tony Rawlinson describes the group as ‘well placed to take advantage of improved market conditions when they arise’. Tony spoke about his ambitions for the group.

In the short term the focus is on improving the quality and size of the business. Tony explained that both Stockbrokers (from 44 to 49) and Advisers (from 49 to 59) have increased the number of retained clients this year, which is satisfying. However, it is not just the number of clients that is important to the group and they are focusing currently on the quality of their client list. Tony makes the point that Dowgate is ‘not wedded’ to the micro-cap market. Currently, their largest clients are around the £40 million market cap size. Without abandoning micro-caps, Tony would like to see this maximum grow to £100 million and above and he believes that some of the group’s existing clients have the potential to grow to this level. The new City team is a positive factor in achieving such an aim.

Tony has ambitions to expand the range of activities, probably by acquisition, to include a Research capability and Fund Management. He believes that these activities would be an expansion of the core business and would enhance the prospects for the whole group.

Tony believes that the Group has the potential to grow to a market capitalisation of £20 to £30 million (from today’s £4 million) in 2 to 3 years. (NB this does not necessarily mean that the share price would multiply by the same factor as it may be necessary to issue new shares to fund acquisitions – MC)

Investment Considerations

Dowgate Capital will have some appeal to micro cap investors looking for a value investment that has considerable potential. With net cash, a dividend and retained customers Dowgate is a lot less risky that many other ‘cheap’ shares.

Dowgate’s performance could improve in the short term, particularly if the new City broking team start to produce results. However, with the AIM market still exceptionally depressed we may see the company just ‘ticking over’ for a while. The key to Dowgate’s future is a revival in the fortunes of the Aim market (Aimzine would be happy to see this too!).

I discussed the prospects for AIM with Tony. He believes that the AIM market would benefit greatly from some major incentives from central government. He would like to see tax breaks and a removal of some of the regulatory burden (e.g. IFRS) and with these in place the AIM market would be well placed when confidence returns to world markets.

For those of our readers who may consider an investment in Dowgate shares, we will remind you of two conflicting factors. Firstly, the share price is in a clear downtrend and the temporary halt around the 10p area could easily give way, particularly if the markets were weak (although the company is repurchasing its shares at this level). On the other hand, here we have a business which is fairly secure which made over £1 million profit in 2007 and could easily make that and perhaps a lot more when the AIM market eventually turns. With Dowgate’s £4 million market capitalisation that prospect is exciting.

Finally, investors may be interested to note that you can, to some extent, follow Dowgate’s fortunes on their website at http://www.dowgatecapital.co.uk/index.php . The website is split into two sections - one for ‘Advisers’ and one for ‘Stockbrokers’. In each section, Dowgate lists their recent transactions and their retained clients.

Aimzine will report on any major development with Dowgate over the coming months.

Footnote: The Dow Gate was one of the later gates added to the London Wall. These later gates included Billingsgate, Bishopsgate, Newgate, Moorgate and Cripplegate. The earlier gates were Aldgate, Aldersgate and Ludgate.

Written by Michael Crockett, Aimzine

 the group does have ‘defensive qualities’

which should be

attractive to long term investors