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A tale of investment in AIM – a disastrous start becomes highly rewarding!

A recent meeting with the management of AIM quoted CVS Group (AIM:CVS) offered a useful reminder of the benefits of patient investing and staying the course. Hopefully the veterinary group will offer plenty more excitement over the coming years as it dominates the UK market and expands overseas.

We first invested in CVS Group at the time of its IPO in October 2007 at a price of 205p. The IPO saw selling shareholders place £92.6m value of shares with the market capitalisation on IPO approx. £105m. It should be remembered that 2007 was the year that AIM saw a flurry of IPOs with AIM reaching a peak of 1694 companies in the year.

There was no new money raised by CVS and the Group arrived on the market carrying £28m of net debt and a shareholders deficit of £1.5m. However cash generative and appealing the business model might appear, negative market sentiment was clearly not going to be good news for a business with a somewhat fragile balance sheet of this type!

When it joined AIM CVS was already one of the leading veterinary service providers in the UK, operating 45 veterinary practices (consisting of 128 individual surgeries) nationwide and three veterinary diagnostic laboratories. It was also the UK’s largest employer of vets with 271 employed, representing 2.2% of all vets estimated to be registered and practising in the UK.

The business was established in 1999 with financial backing from funds managed by Sovereign Capital Partners LLP with the objective of consolidating the fragmented UK veterinary services market. It had already completed acquisitions costing approximately £32.9m.

Turnover for the year ending June 2007 prior to admission was £38.9m and operating profit £2.9m.

Simon Innes had been appointed Chief Executive in 2004 and remains in the role to this day. Prior to CVS he was Chief Executive of Vision Express from 2000 to 2004, over which time he built the business up to £220m turnover and 205 practices. The growth strategy that was successful at Vision Express formed the model of that being implemented by CVS.

Notwithstanding the apparent defensive qualities of the veterinary sector CVS subsequently saw its share price tumble from 242p to a low of 79p, a near 70% sell-off. While we didn’t feel brave enough to whole heartedly commit further client funds we retained a position in the CVS for many of our clients and as things started to look more assured started buying again.

Fast forward 10 years to 2017 and CVS has just reported record results.

Group revenue for the year ending 30 June 2017 leapt 24.6% to £271.8m, with like-for-like sales growth for the Group of +6.3%. Of this The Veterinary Practices Division contributed the lion’s share, growing revenue 25% to £247.9m.

Operating profit rose 46.2% to £17.2m, cash generated from operations increased 10.8% to £37.2m and profit before tax increased 58.4% to £14.5m. Basic Earnings per share increased 59.5% to 18.5p.

CVS acquired 62 surgeries in the financial year and now own 432 surgeries in the UK and the Netherlands. In the UK the equine business has also expanded strongly.

The business is now managed across four divisions: Veterinary Practice, Laboratories, Crematoria and Animed Direct. The Veterinary Practice Division remains the core but all areas are performing well.

The development of their referrals business has been a key priority of late and in October 2015 they opened Lumbry Park in Hampshire, a 13,000 square foot state-of-the-art multi-disciplinary referral centre. This provides a full range of specialisms, using the most modern equipment including both a CT and an MRI scanner. Early teething problems have now been resolved and profitability is now around the corner for Lumbry.

The Group has its MiPet own brand range of products and dual language packaging (English and Dutch) has begun to be introduced so that they can also sell their own brand products in the Netherlands.

The Healthy Pet Club loyalty scheme saw over 53,000 pets added to the scheme increasing membership by 20.9% and bringing the total membership to 306,000. The scheme provides preventative medicine to their customers’ pets as well as a range of discounts and benefits. The Group gains from improved customer loyalty, the encouragement of clinical compliance, protecting revenue generated from drug sales, and bringing more customers into their surgeries. Monthly subscription revenue generated in the year increased to £32.5m (2016: £24.0m) and at the year end, the monthly run rate represented 13.4% (2016: 12.3%) of practice revenue.

CVS also now has 14 emergency out-of-hours sites thereby reducing reliance on third parties for the 24-hour cover that vets are required to provide.

The ten sites in the Netherlands are likely to be joined by others in the short term. This will provide a base from which to establish an integrated business in the Netherlands in a similar way to the UK; the Netherlands is 20% the size of the UK market.

The buying group was enhanced by the acquisition of VetShare and they have now negotiated additional annual rebates for members and sell own brand products to them. We anticipate plenty more gains from improved buying terms over the coming years.

The Group also launched its own MiPet Cover insurance in August 2017 with the initial plan to establish the product in their own practices before considering wider marketing.

A MiNurse Academy was launched in January 2015 and has now helped over 300 nurses learn specialised skills.

A vet graduate training scheme continues to grow and 375 graduates have gone through the scheme in the past three years. The scheme is designed to assist newly qualified vets make the challenging transition from university to day-to-day practice.

Other smaller divisions also performed well as the Group is able to benefit from a broader offering with all divisions serving the practices.

As you can gauge from the above, this business is really starting to dominate all aspects of the veterinary market in the UK.

With plenty more growth to go for in the UK, the Netherlands acquisition strategy in its infancy and ancillary activities such as Laboratories, Crematoria and Animed Direct really now starting to come through, the future looks very bright for CVS.

Those brave enough to have bought shares around the 79p level and held on until now will have enjoyed a 1700% return to date.

Investors in many high flying high growth companies such as ASOS or Amazon and Monster Beverage in the US will have similar stories to tell of multiple share price sell-offs before confidence sets in and the share price and valuation moves to another level. Thankfully CVS’ dip was relatively soon after IPO but no doubt there will be other psychological challenges ahead for investors.

Casting an eye back to the IPO and what went wrong in the early days on AIM, we remain wary that CVS doesn’t overdo the gearing. Net debt at June 2017 year end was £100m and there remained plenty of headroom following an agreed £37.5m increase to its existing credit facility. Thankfully the cost of debt is also considerably cheaper now than 10 years ago. Free cash flow of £23.8m highlights the attraction of the business model and evidently if they stopped acquiring there would be plenty of cash available to pay down debt in quick time.

We anticipate further equity raises to support the likely acquisitions in the UK and Netherlands.

Hopefully investors in CVS will continue to be rewarded for their patience!

If you are interested in investing in high growth companies or AIM shares for Inheritance Tax planning please contact Chris or Stephen at Fundamental Asset Management by visiting the link here.

Our associated research business Investor’s Champion has covered CVS Group since IPO – please visit the link here for their research

 


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Which shares are exempt from UK Inheritance Tax?

In this video with IG markets Chris Boxall of AIM specialist Fundamental Asset Management highlights what to be wary of when assessing AIM shares for Inheritance Tax planning purposes – there are plenty of problem areas to trip up investors!

August 2017 saw AIM’s market value breach £100bn. This Investor’s Champion Blog compares AIM of August 2017 with the market in 2007, the last time it hit the magical £100bn level – it’s certainly a very different market now!  You can read the Blog from the link here.


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IG AIM portfolio update – September 2017

In this September 2017 video with IG markets Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, provides a quarterly update on the AIM portfolio created for IG Markets which continues to perform strongly. Stocks discussed in this interview include Atlantis Resources, Bioventix, H&T Group, RWS Holdings, Smart Metering Systems and Watkin Jones. Chris reflects on their investment credentials and what to look out for from these high growth small caps.


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How important are AIM listed companies to a well-balanced portfolio of investments?

AIM is fast gaining a reputation as a great market for stock pickers. In this video with IG Markets Chris Boxall, co-founder of AIM specialist investment manager Fundamental Asset Management, explains how AIM has been a ‘huge success’ for prudent stock pickers over the past few years and continues to deliver outperformance.

Despite the seemingly rich valuations of many larger AIM stocks, Chris explains that, if you are prepared to ‘do the work’ and undertake proper research, there are still excellent investment opportunities in AIM for patient, long-term investors. For those investors also seeking to mitigate potential Inheritance Tax AIM has further attractions!

AIM even has attractions for income seekers!

For further information on Fundamental Asset Management’s AIM portfolio service Email [email protected] or Call 01923 713890.

www.fundamentalasset.com

 



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IG interview – AIM portfolio update

In the latest video with IG markets Chris Boxall, co-founder of AIM specialist investment manager Fundamental Asset Management, provides an update on the AIM portfolio created for IG  which has performed strongly since inception in September 2016. Stocks discussed include Bioventix, Flowtech Fluidpower, Smart Metering Systems and Watkin Jones. Chris highlights the key attractions of these exciting small caps and what to look for going forward.


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April sees AIM surge higher as London’s growth market approaches GBP100 billion value

It was encouraging to see AIM welcome several high growth new arrivals in April 2017 with the market value of AIM creeping ever closer to GBP100bn – good news for those investing in AIM for Inheritance Tax planning purposes

At the end of April 2017 there were 967 companies on AIM with the total market value of London’s growth market GBP92.83bn. This compares with the same number at the end of March 2017 when the market value was GBP88.78bn; there were 5 departures and the same number of new arrivals. It was encouraging again to see newcomers match leavers

A notable departure was Sirius Minerals, the fertilizer development company, which moved onto the Main Market.

AIM’s total market value hit a high of GBP108bn in July 2007 with 1,673 companies on the market. The market value subsequently fell dramatically in 2008 to only GBP37bn, with the AIM Allshare Index tumbling just over 67% over that period. It will therefore be a huge achievement for AIM to breach the GBP100bn level once again, especially with over 700 fewer companies than previously, yet again highlighting the dramatically improved quality of AIM.

From our perspective two of the more interesting AIM news arrivals were as follows:

Alpha FX Group (AIM:AFX) is a corporate foreign exchange specialist with a strategic focus on helping its clients control the impact currency volatility has on their business.

For those faced with the challenge of hedging their cash flow forecasts, they provide hedging programmes that ensure they can price competitively, maintain profit margins and cash flow. For those who don’t need a hedging programme, they still provide a range of execution services designed to reduce the time, cost and cash flow constraints that come from managing FX.

This is a highly profitable and cash generative business.

The Group raised £13m of new money and saw vendors sell down £17m at a share price of 196p. The shares got off to a very strong start on AIM and are currently up over 60% on the IPO price at 321p per share pushing the market capitalisation up to £105m.

The shareholder register includes some well-known institutions including Soros Fund management, who should know a thing or 2 about Foreign Exchange!
K3 Capital Group PLC (AIM:K3C) is a business sales and brokerage business headquartered in Bolton with operations throughout the UK and another highly profitable operation.

K3C helps its clients with the presentation of their businesses for sale to market, sourcing potential acquirers, and project management of transactions to completion. The Group has three trading subsidiaries KBS Corporate, KBS Corporate Finance and Knightsbridge.

The AIM placing raised £15.7m of old money for selling shareholders and £2.1m of new money.

 

Fundamental Asset Management has provided AIM Portfolio Management for Inheritance Tax planning purposes for over 10 years and has an outstanding performance track record.  Further information on our AIM services are available from the link here


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AIM for the end of the tax year

AIM, the London Stock Exchange’s international market for smaller growing companies has delivered terrific performance over the past 12 months, highlighting its growing maturity and the hugely improved quality of its constituent companies. We would strongly encourage investors seeking exposure to growing, profitable, cash generative, dividend paying smaller quoted companies to take a closer look at AIM this ISA season. If one adds the Inheritance Tax benefits, especially in an ISA wrapper, many AIM companies make a compelling investment proposition.

While the FTSE100 has risen an admirable 20% over the past 12 months to date, the AIM All Share Index has eclipsed this with a rise of 29%. Inheritance Tax planning portfolios also continue to outperform and offer greatly improved liquidity compared with many years ago.

At the end of February 2017 there were 973 companies on AIM with the total market value £86.8bn, resulting in an average market capitalisation per AIM company of just over £89m. Looking back 12 months to February 2016 and AIM’s total market capitalisation was only £68.6bn but there were 1,029 companies, resulting in an average market cap per company of only £66.7m.

While there have been a large number of departures from AIM over the past 12 months, including several high quality companies like Fyffes, the importer of tropical produce, which was taken over in February, the vast number of leavers were perennial under-achievers whose time was up! For the first time in many months, February 2017 encouragingly also saw AIM new arrivals match cancellations with 5 departures and 5 genuine new arrivals.

Looking back again 12 months to 2016 and there were 4 AIM companies with market capitalisations over £1bn, with the aggregate market value of these £7.3bn. By comparison, at the end of February 2017 there were 8 AIM companies with market capitalisations of over £1bn with an aggregate value of £14.4bn.

A glance at the lower of end of AIM also supports our view of the improving quality of the market.
Back in February 2016 there were 232 companies (22.5% of the number of companies on AIM) with market capitalisations no greater than £5m. Fast-forward 12 months and this has fallen to 171 companies or 17.5% of the total at the end of February 2017.

However, the statistics don’t tell the true story. It’s the nature of AIM’s larger constituent companies that is really encouraging. Looking back further to 2011 and AIM’s Top 50 companies were dominated by mining and oil and gas companies, many of which were operating in faraway places and consuming vast amounts of cash. The Top 50 of 2017 is now dominated by profitable, cash generative companies that will be familiar to many, notably retailers ASOS and boohoo.com, the soft drinks groups Nichols (Vimto) and Fevertree Drinks and Breedon Group, the largest independent construction materials group in the UK.

While many companies in the Top 50 have significant operations overseas and are therefore currently enjoying a nice currency boost due to the weakness of Sterling, the management and centre of operations are predominantly UK based. This offers confidence to investors who may want to meet with management or carry out company visits – it’s certainly a lot easier assessing the investment merits of a retailer compared with that of an explorer in some far-off land!

The share prices of many of AIM’s largest companies have risen strongly over the past few months suggesting the valuations of some now appear somewhat stretched, however there are also plenty of more compelling opportunities among AIM’s smaller companies that are worthy of greater attention. Substantial AIM businesses like family controlled Watkin Jones Group, one of the UK’s leading construction and development companies or Smart Metering Systems who connects, owns and operates gas and electricity meters on behalf of major energy companies could have a very bright future.

Our AIM for Inheritance Tax planning portfolios can be accessed through our platform with Jarvis Investments or via the Elevate, Transact, Nucleus and Standard Life wrap platforms.

Take a closer look at AIM this ISA season!


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IG AIM portfolio update – is AIM over valued?

In the latest video with IG markets Chris Boxall provides an update on the AIM portfolio discussing 4 top performers. Chris also offers valuation thoughts on AIM, including those on a high profile company that has seen its share price soar on recent news.  Stocks discussed include AB Dynamics, Fulcrum Utility Services, MartinCo, Purple Bricks Group, Watkin Jones, and XL Media