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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



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AIM’s big currency winners

Christopher Boxall, Manager of Fundamental Asset Management’s AIM portfolio service, has recently been featured in the Share Centre Blog and Yorkshire Post.

‘AIM’s big currency winners’ on the Share Centre Blog identifies four larger AIM companies with significant overseas earnings and predominantly UK based costs, who will be beneficiaries of Sterling’s current weakness. Click here to read this on the Share Centre Blog

An October 2016 Share Centre Blog post identifies former AIM underachievers that look set to blossom! This can be read here 

An article in the Yorkshire Post comments how Pension deficits are weighing on the shoulders of big business but are less of a concern for a large number of Yorkshire’s AIM companies. You read the article here 

 


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Client money can stay ‘on platform’ with Fundamental AIM for IHT planning portfolios

The improving quality of companies on AIM, combined with the Individual Savings Account (ISA) rule changes from August 2013 which allowed AIM shares to be held within ISAs, has seen a growing number of investors consider AIM for both its investment and tax planning attractions. The ability to invest in inheritance tax (IHT) qualifying portfolios through many leading wrap platforms now makes it even easier for clients and advisers.

AIM continues to be a market for small, relatively early stage businesses but is also attracting a growing number of more mature, highly profitable, family or founder controlled companies.

There were only 1,000 companies on AIM at the end of September 2016 which is down from 1,044 at the end of 2015 (December or September?). Despite the declining numbers of companies the overall market capitalisation of AIM continued to surge higher to £82.98bn at the month end, compared with £80.57bn at the end of August and only £73bn at the end of 2015.

AIM is no longer the high-risk market of former times, where speculative resource stocks and unknown international companies proliferated. It is now home to a large number of well-managed, profitable, dividend yielding UK based business.

As the market has improved it has also become much easier for investors to buy and sell AIM shares and for advisers to offer access to these exciting companies to their clients, many of which come with attractive inheritance tax planning benefits.

Prudently managed, AIM for IHT planning portfolios have delivered outstanding investment returns over the past few years, significantly outperforming leading UK indices. To end September 2016, the standard Fundamental AIM IHT Portfolio has risen over 100% over five years, which compares with a meagre 30% rise from the FTSE100.

The purchase and sale of AIM quoted securities often used to be the preserve of specialist brokers but Fundamental AIM IHT Portfolios can now be accessed through leading wrap platforms. This means that, in allocating money to a specialist manager, advisers aren’t forced to direct money off platform, which can cause unnecessary monitoring and administrative burdens, not to mention a fear of the unknown.

Advisers can keep everything in one place maintaining the same pricing structure.

Investing via platforms can also expedite investment without the need to complete lots of paperwork, which is particularly important for AIM for inheritance tax planning purposes with the short, two year, qualifying period a key attraction.

Fundamental AIM IHT Portfolios can currently be accessed on the Transact, Elevate and Nucleus platforms.

To find out how you can access these compelling investment and tax planning solutions please contact Stephen Drabwell on 01923 713892 or email [email protected]



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AIM breaches £80bn

The value of the AIM  market grew again in August reaching a level not seen for several years.

At the end of August 2016 there were 1,007 companies on AIM with the total market value £80.568bn. This compares with 1,010 companies on AIM at the end of July 2016 when the market value was £77.396bn. The FTSE AIM 100 index rose 3.44% in the period which compares positively to the rather modest 0.85% rise of the FTSE100.

This is the first time AIM had breached the £80bn month end market cap level since February 2014 when companies with a total market value of £1bn were admitted. August 2016’s new arrivals had a market capitalisation on AIM admission of only £197m highlighting the strong growth of the market as a whole.

While AIM remains well below its high point of July 2007 when the resources sector was in full swing and the market capitalisation of the junior market hit £108bn, we sense that the current newcomers are likely to be around a lot longer than the vast majority that joined back then.

It’s interesting to note that back in July 2007 a staggering 36 companies joined AIM with a market capitalisation of a whopping £2.5bn. Even August 2007 saw 27 admissions with a market capitalisation of £1.2bn. While the corporate brokers may be longing for a return of the glory days of old, we think shareholders are much better off with the current status quo of ‘less is more’.

The AIMsearch tool on FAM’s sister site www.investorschampion.com continues to offer guidance on which AIM companies benefit from valuable tax benefits which is freely accessible for both IFAs and investors to use.


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Do we really know what we are investing in? Time to reconnect with our investments

The latest investment fund offering from a company called Source, whose web site prattles on about something called Smart Beta, only serves to highlight to us the growing disconnect between investors and their investments. An investment maxim, followed by most of the great investors, was to always ‘invest in what you know’. Unfortunately, in today’s jargon filled investment arena most private investors probably haven’t a clue what they have actually invested in, given the growing prevalence of some bizarre Exchange Traded Funds (‘ETFs’), Structured Products etc. Wouldn’t it be better for investors to have a better understanding of what they were investing in and connect once again with their investments?

Source is yet another provider of ETFs whose product range includes a vast number of collective investment schemes following a diverse number of passive strategies, across sectors, regions, indices, commodities, currencies etc. So rather than invest in something the average person could mildly understand, like a ‘well-known’ index, they invest in baskets of stocks, bonds, or good knows what, largely around some newly created passive index of their own making.

We are all for index investing, which was originally intended to mean passive funds based on leading stock market indices, but, in creating an ever growing number of index based strategies, the financial services industry has managed to complicate a previously simple concept; now that’s a change!

  • Do private client managers outperform?

While many funds are criticised for underperforming the benchmark indices, we believe that many private client portfolios investing in direct equities with much broader investment mandates consistently outperform. Furthermore, with a full knowledge of every stock they hold, clients know exactly how their performance has been achieved.

Direct investment in equities and bonds means private investors have a full understanding of what they are holding. The ease of investing globally also means that private investors can easily build a nicely balance portfolio that isn’t geographically constrained.

Investing in AIM quoted companies for inheritance tax planning purposes necessitates investors holding the shares directly and not via a fund vehicle. This way investors get to know all of their holdings rather than the top 10 holdings of some bland fund, which is usually the case.

It therefore seems foolish for private investors (of more mature years in particular), to gain exposure to this exciting and high performing investment arena via investment funds. In adopting a fund approach private investors would fail to benefit from the attractive inheritance tax breaks that are only available via direct investment. The less liquid nature of small and micro-cap companies also means that funds have much greater difficulty buying and selling in this arena. Investors would also miss out on being better connected with some enticing high growth companies, some of which could be the blue chips of the future!

 

We advocate investing in what you know and there are plenty of terrific little companies on AIM to know more about!

 


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Flawless performance on AIM from this lovely business offers a great guide of what to look for from a micro-cap

A manufacturer of advanced testing systems to the global automotive industry has just delivered yet another set of fabulous results. While many seem intent on criticising AIM for its looser regulation (and ‘occasional’ problem case) this little business has delivered consistent excellence since arriving on AIM in 2013, with little fanfare I should add. It also highlights the potential to uncover some really brilliant businesses on the junior market if one undertakes proper research and displays a bit of patience. Our latest Blog covers this delightful Group’s journey from AIM Admission which serves as an excellent guide of what to look out for in the search for high performing micro-caps.

– Far from the madding crowd

With its headquarters in the delightful town of Bradford-on-Avon, Wiltshire, AB Dynamics (AIM:ABDP) is engaged in the design, manufacture and supply to the global automotive industry of advanced testing and measurement products for vehicle suspension, brakes and steering both in the laboratory and on the test track. Customers include the research and development divisions of some of the world’s leading vehicle manufacturers, including Ford, Toyota, Daimler, BMW, Volkswagen and Honda. At a time when the automotive industry is under intense scrutiny following the VW (and more recently Mitsubishi) emissions scandal, AB Dynamics excellent engineering offering is in increasing demand.

– Background

Operating subsidiary Anthony Best Dynamics Limited, was founded in 1982 by current Executive Chairman Anthony Best as a design consultancy in mechanical vibration and vehicle suspension to the automotive and wider engineering industry. In 1983, Andrew Middleton joined the Group and added expertise in noise consultancy to the Group’s service offering.

In the 1980s and 1990s, the Group was involved in a number of consultancy projects, including the design of the suspension of the McLaren F1 road car, an active suspension system for Jaguar and the development for Land Rover of a measurement and analytical system for end-of-line noise vibration and harshness called PLATO.

Carontest

In the 1990s, as the UK automotive industry continued to decline, the Group shifted its focus away from consultancy towards the design and production of vehicle test equipment for automotive manufacturers and suppliers. This led to the design and manufacture of the Suspension Parameter Measurement Machine (SPMM), one of the Group’s key products. The SPMM measures the kinematic and compliance characteristics of vehicles by employing a method of moving the vehicle’s body in a manner that simulates the real motion of a vehicle on the road. This method also allows accurate measurements to be made of a vehicle’s inertial properties and centre of gravity.

Over the years the range of vehicle testing products was expanded to meet the growing demands of the industry. In 1998 it supplied its first steering robot for quantitative vehicle testing on the track and has, to date, supplied over 300 driving robot systems around the world. The Group was also a pioneer in using inertial GPS motion packs to control the path of a vehicle in 2003 and, in 2007, was one of the first manufacturers to sell a driverless system for testing vehicles on the track.

driverless

With founder and Executive Chairman Tony Best seeking to enhance the Group’s corporate profile and provide for some succession planning a listing on AIM was the preferred option. Despite his advanced years Tony remain very active in the business.

Tim Rogers joined the Group as Chief Executive in October 2012 in preparation for their launch onto public markets. Prior to joining ABDP Tim was CEO and Executive VP of Clean Diesel Technologies, Inc which specialised in vehicle emission reduction technology.

– AIM arrival

The Group arrived on AIM on 22nd May 2013 with a market capitalisation of a mere £14m having raised gross proceeds of only £2m (net) and with a flawless balance sheet. The founders and senior management also sold down a combined £2.5m on listing to offer a degree of liquidity. The market capitalisation has since grown to £84m, solely organically!

For the full year ending 31st August 2012 prior to arrival on AIM the Group reported revenue of £8.9m and pre-tax profit of £1.9m. Their most recent ‘half year’ results are now exceeding those numbers.

Not long after arrival on AIM came news of two significant contract wins and then a month or so later yet another significant contract win. By the time of the announcement of its maiden AIM results on 7th November 2013 covering the year to 31st August 2013 the share price had already more than doubled to 170p. This was supported by full year results which saw revenue up 37% to £12.2m and operating profit up 22% to £2.2m. Cash had also risen to £6.0m.

The only frustration during this time was uncertainty surrounding a new purpose built factory that they were hoping to build.

The good news continued throughout 2014 including a significant contract win for their Suspension Parameter Measurement Machine (“SPMM”) from China.

Having reassured on 10th September 2014 that results for the year ended 31 August 2014 were likely to be in line with market forecasts, by the end of that month they were saying that profits for the year were now likely to exceed market forecasts due to higher than anticipated profit on a number of contracts. There is nothing like under promising and over delivering!

The most recent full year results for year ending August 2015 saw revenue leap again by 19% to £16.52m and operating profit up a whopping 41% to £3.74m. Net cash at year end stood at an impressive £7.97m.

This week they announced tremendous interim results for the 6 months ending 29th February 2016 with profit before tax up 50% to £2.26m on revenues up 34% to 10.11m.

In summary, up to now this business has delivered all that could be asked of it. More importantly it displays everything one would want from a small high growth business on AIM.

– What to look for in a micro-cap

Senior management receive reasonable salaries, commensurate with the size of the business, and more importantly, have plenty of ‘skin in the game’, via direct equity holdings and some encouraging options; they are therefore well aligned with shareholders. Since listing, principal shareholder Anthony Best has taken the opportunity to dispose of further shares, supporting better liquidity, though still retains a material 37.5% stake in the business.

The group is growing the top line at a terrific rate, supported by internally generated cash and without the need to return to the market for further funding. Growth up to now has also been all organic. Operating margins are a very healthy 22%, cash flow highly positive and a return on equity of 23% is just what one should be looking for.

Newsflow has been regular, if not overwhelming, resulting in regular earnings upgrades.

The Group is debt free and the cash pile has grown to just over £10m. In isolation this looks excessive for a small business of its size, but that will soon be put to good use in supporting the development of the new facility.

It’s worth also noting how, ever since listing, ABDP has reported its results in a timely fashion. Full year results for the year to August 2015 were announced on 12th November and the most recent interims to 29th February 2016 were announced on 26th April 2016. We are always surprised why other AIM companies can’t deliver in this timescale.

– Strong demand for its products

The Group continues to enjoy strong demand for its products and services, with both its established and newly developed range of products driving growth in revenues. Key markets in China, Europe, Korea and Japan remain strong and they see continued spend on R&D by the global automotive industry, notably in the areas of active safety systems and improved vehicle dynamics, where the Group’s products are particularly suited.

Two additional manufacturing units came on line this year more than doubling total floor area to 23,551 ft². The Company also confirmed they were making good progress in the design and build of the new facility which is targeted for completion during 2017 which will bring UK operations together again under one roof and create the necessary headroom for future growth.

A collaboration agreement with Williams Advanced Engineering is currently for a novel Driver in Loop Simulator which will help their car customers develop safer and better cars by combining the driver with computational car modelling.

– Broker estimates lifted again

In response to the latest results the house broker lifted estimates for the financial year ending August 2016 to sales of £20.2m, pre-tax profit of £4.7m and earnings per share of 21.6p. At the current share price of 485p this puts the shares on a fairly punchy current year rating of 22x, although stripping out the cash pile brings that down to a more manageable 19x. Earnings are anticipated to grow to 24.6p in 2017 (PER 19.7x) and as they start to reap the benefits of the new facility, forecast to jump to 32p for the year ending August 2018.

 

There are bound to be a few speed bumps on the road to further success, which may rock the share price, but AB Dynamics has performed admirably up to now. The move to a larger facility in 2017, increased sales in Europe and Asia and the recent strategic alliance with Williams suggests a very exciting future for this specialist engineer.


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Paul Scott’s Small Cap Snapshot – 24th March 2016

Results season is in full swing, so Paul is scrutinising the accounts of dozens of smaller companies each week. We offer below a few interesting stocks that caught his eye.

Paul Scott, the ‘UK’s most prolific small cap blogger’, provides research for Fundamental’s Small Cap Value Portfolio Service.

 

Laura Ashley (ALY) 24p

Results for the year ended 31 Jan 2016 were a tad disappointing, although delving into the detail revealed that the core UK retail business actually had quite a good year, with profits up. The fly in the ointment was Japan – a big earner for the overseas, franchised operations. Also a £1.3m loss was incurred from the insolvency of Laura Ashley’s Australian franchisee.

Ashley

Despite this, the business remained remarkably cash generative, and has maintained a dividend payout (for the 5th year running) of 2.0p per share. That equates to a stonking yield of about 8%. Moreover, the business generated enough cash to finance this generous dividend, and it has a relatively strong balance sheet too.
So a very attractive proposition for income seekers. Mind you, we cannot be certain the big dividends will continue, as after all the payout is a policy decision by management. The dominant Malaysian shareholders are certainly not disadvantaging minority shareholders by paying such generous dividends -–long may it continue!

 

Focusrite (AIM:TUNE) 174p

I had not looked at this company before, but on an initial review a few days ago, I liked the look of it. This is another company with a dominant major shareholder. The company makes innovative electronic equipment for musicians. The organic growth since 2009 is highly impressive. The balance sheet is solid, with £6.2m in net cash.

Clarett Thunderbolt

The only thing I don’t like about this share is the price – at 174p the rating is quite high, at a PER of 18.5x August 2016 estimates. That said, sometimes you just have to pay up for quality. I’ll do some deeper research on this company over time. I find the research process is an ongoing thing – you get to know companies gradually, and build on your knowledge, rather than it being a one-off procedure.

Investor’s Champion has also covered Focusrite since IPO

 

Synety (AIM:SNTY) 82p

This is definitely not one for widows or orphans! Synety is a very speculative share, which has disappointed in the past – management over-optimism meant that they misjudged the amount of cash required, ending up doing a deeply discounted Placing at 90p last year.

However, the new Chairman, Peter Simmonds, seems to be having a very positive impact on strategy. He of course successfully built up DotDigital, so knows a thing or two about SaaS businesses.

I feel Synety has just reached a tipping point, where it is clearly now funded to breakeven, as set out in the recent results statement narrative. Organic top line growth is running at 103%, which together with cost cutting, means that cash burn has now reduced to approximately £200k per month, and falling. So it should reach breakeven in mid-2017, and has adequate cash + loan facilities, to get there.

Therefore I see potential for a step change in the way this company is valued. Once investors stop fretting about the cash running out, and instead begin to calculate the returns that 100% top line growth, combined with gross margins of nearly 80% can do to the bottom line, then it could get interesting.
That said, the company is not out of the woods yet. If current trends continue, and management sounded confident in a webinar this week, then there could be exciting upside here I think.

 

Eclectic Bar Group (AIM:BAR) 60p

Not really a sector that I want to invest in – nightclubs and bars often make very poor investments. However the interesting aspect here is that highly respected businessman Luke Johnson got involved last year, buying a stake personally, and becoming Exec. Chairman. Interim results this week show that the company is beginning to turn around, with a loss last year turning into a small profit this year.

ecelectic

So again a very speculative idea, but I like turnaround situations, and might possibly have a small dabble in this one. Although note that the share is horribly illiquid.

 

Disclosure: Paul holds personal long positions in Laura Ashley, and Synety.