AIM Industry Report 2017/18

14 15 companies with a premium listing on the LSE, AIM-quoted companies are also being encouraged to adopt it as best practice. The IA views annual reports as “an important source of information for investors, and the primary means of communication to the market. Our members look to it to provide the building blocks upon which they make their investment decisions, and for ongoing stewardship activities. In this respect, Annual Reports should strive to provide a true long term understanding of the business and its drivers, its financial strength, and the quality of management and their decisions 5 .” Areas of particular focus are business models, productivity, capital management, disclosure of material environmental and social risks, and human capital and culture. Given their minimum investment holding periods, those investing in AIM-quoted companies for EIS or VCT qualification are particularly likely to agree with the IA members who, “believe that reporting should strive to provide insight into the significant strategic issues, as well as the principal risks, facing the company over the next three to five years 6 .” The guidance makes recommendations in relation to better disclosure of how investee companies are planning for the long term and utilising capital efficiently. One of the main goals is very much in line with current Government focus, to ensure that investors, “are better able to identify and finance those companies contributing productive growth in the UK economy 7 .” The suggestion is that there are significant potential benefits for investee companies that will accrue from higher standards of reporting in terms of attracting investment. The ongoing question is whether AIM- quoted firms, particularly the smaller ones, have the time or resources to fulfil these recommendations, putting them in the proverbial chicken and egg situation. The LSE guidance is not dissimilar to the standard encouraged by the Financial Reporting Council (FRC), which said in its Annual Review of Corporate Reporting 2016/17 that, “We believe that companies need to be transparent as to what they consider to be the key sources of value, how they are managed and how value is likely to be generated in the future.” Over the last three years the FRC has been focusing on improving the quality of reporting by smaller listed and AIM companies, and will assess whether there has been any discernible change in reporting by these companies as part of its corporate reporting and audit monitoring work in 2018/19. This will include a review of two specific aspects of the next published reports and accounts of 40 pre-warned smaller listed and AIM-quoted companies, with a focus on the oil and gas sector, general retailers and business support services. The items to be looked at will include the effects of Brexit on how companies disclose principal risks and uncertainties and transparency of reporting 8 . So, in the near future, improved reporting for AIM-quoted companies may become a requirement rather than a choice. Another regulatory item to take into account is MiFID II, which extends the initial MiFID rules introduced in 2007 to boost transparency across the EU’s financial markets and enhance investor protections. The new rules come into effect from January 2018 and one of the items that will be affected is research. At present, most trading and investment firms get free investment research from the brokerages and investment banks they use to buy and sell holdings. But, under MiFID II this will no longer be allowed. These firms will be required to pay for research as a separate item in order to show they are not being encouraged to trade with a particular firm in return for free research. The cost of that research may be passed on to clients 9 although this will depend on the particular investment manager. Still, MiFID II has the potential to make investing on AIM more expensive for both managers and investors. Traditional research providers may also focus their research on larger cap companies, where there is more demand for shares, and this could have the effect of drastically reducing the amount of research available on AIM stocks to both institutional and private investors. Of course, this could leave those who are prepared to do the work and who have the strong stock picking skills required with less competition to uncover the best opportunities in smaller firms. The FRC recently stated that, with Brexit on the horizon but a lack of clarity over its outcome, most companies were publishing details about the uncertainties they face with “more detail” than previously 10 . In terms of transparency and the trust that it can build, this is a positive development for both investors and investees. Other positives were evident in UHY Hacker Young’s report on AIM for the 2016/17 tax year. It found that investors’ growth appetite had not been diminished by the Brexit vote 11 . However, in the second half of 2017, as Brexit negotiations looked increasingly fragile, the Lloyds Bank Investor Sentiment Index suggested the jump in the popularity of cash (increasing almost 11%) and gold reflects growing concern about geopolitical and Brexit risks. The sentiment towards UK equities also fell by 1% at the start of October 2017 12 and this could restrict future AIM investment, including in the smaller AIM companies. Nevertheless, research published in October 2017 suggested that 30% of larger SMEs have raised equity finance and that around a sixth see a role for equity funding from a variety of sources 13 . The jury is still out on the future for SMEs after the UK’s withdrawal from the EU – a survey of small business owners a year after the vote revealed that, post-Brexit, 40% of businesses expect no change in how they operate, but a further 40% expect an uncertain future. The same survey found that, “Nearly half of businesses, however (47%), have seen no repercussions, good or bad, from the Brexit result as of yet. These results aren’t all that surprising, with many small businesses in the UK dealing with small-scale, local trade (such as restaurants, beauty salons, accountants, etc...). The only impact they will see is if Brexit hits the pockets of the British population in general. We’ve seen evidence of this already, with household income and savings on the decline, but so far, it isn’t translating into mass turmoil for the UK SME industry 14 .” This split in opinions perhaps reflects the findings of the British Business Bank which highlight the massive variations in bank lending to different business sectors when comparing the average amount lent before and after the Brexit vote. The inference is that some sectors are viewed as riskier than others and are consequently facing an increasing struggle for mainstream funding and clarity about the future. “AIM has been in existence since 1995 and provides a lighter touch regulatory environment for a diverse range of companies from start-up technology firms to well-known high street stores.” — SHARON PRIEST, BLACKFINCH BREXIT IMPACT HOW DOES IT AFFECT SMALL BUSINESSES? AVERAGE UK BANK LENDING TO SMALL BUSINESSES IN SOURCE: BBA, 30 JUNE 2017 % CHANGE FROM 2014 H1 2015 H2 2015 H1 2016 H2 2016 Q1 2017 BREXIT IMPACT Overall £m lending Q1 2017 MANUFACTURING 116% 116% 131% 133% 148% 23% £30m AGRICULTURE, FORESTRY, FISHING 109% 97% 103% 104% 124% 12% £109m TRANSPORT, STORAGE & COMMS 107% 98% 137% 128% 131% 8% £20m WHOLESALE AND RETAIL TRADE 107% 99% 118% 112% 120% 6% £68m RECREATIONAL, PERSONAL & COMMUNITY 112% 97% 115% 107% 116% 1% £22m TOTAL: SMALL BUSINESSES 110% 103% 112% 104% 115% 0% £608m ACCOMMODATION & FOOD 100% 99% 105% 90% 118% 0% £51m EDUCATION 79% 89% 112% 94% 100% 0% £5m HUMAN HEALTH & SOCIAL WORK 112% 90% 98% 86% 110% 0% £50m REAL ESTATE & PROF. SERVICES 113% 103% 110% 103% 109% -1% £184m UTILITY, SUPPLY, MINING & QUARRYING 113% 79% 134% 104% 109% -6% £3m BUY/SELL & RENT/OWN OR LEASED REAL ESTATE 117% 104% 98% 92% 85% -8% £111m POSITIVE IMPACT NEGATIVEE IMPACT BREXIT REFERENDUM