AIM Industry Report 2017/18

20 21 DEMYSTIFYING THE AIM BUBBLE WHAT IS THE REALITY? There has been discussion for over a decade about the potential for a bubble to form in some sectors of the AIM market. Investor’s Champion, which has a service that screens for stocks qualifying for IHT relief, estimates that around a third of all the money invested in AIM is from IHT planning services 34 . In what is already a relatively small investment universe, the BR eligibility criteria further cut the number of possible options for IHT planning services focused on the market. Additionally, while AIM is focused on trading in firms which are traditionally riskier than those found on the primary markets, IHT portfolio managers are obviously concerned with capital preservation. As a result, they tend to target the stocks with greater liquidity and size with a record of stability, and dividends. It seems that this equates to a fairly small and predictable sub-set; we looked at a selection of the top ten AIM portfolio services listed on MICAP (by size) (all of which are IHT services) and found a high instance of duplication of their top ten stock holdings, with a core of four or five investee companies featuring in virtually all of the portfolios. The logical implication is that the high demand for the modest amount of ‘safe’ AIM stocks has driven valuations higher. But the question is: does that make them over-valued, particularly in the context of stability, rather than outstanding growth? The reality is, of course, that managers are aware of this dynamic and in the arena of BR qualifying AIM shares, they are aided by the long-term nature of IHT mitigation portfolios – they are not required to buy and sell regularly and seldom trade, although they do have the capacity to do so, should a stock become unsuitable. MARKET CAP OF NEW AIM IPOs BY SECTOR (JANUARY – SEPTEMBER 2017) Nevertheless, some commentators, even those in the BR sector, say that it is largely impossible for a manager to force up the stock price by simply continuing to buy, buy, buy. This is because there just isn’t the volume available to coerce the seller into pushing the price back up. They would be more likely to move on to another company. So, the goal is to spot firms that are not brand new and have experienced a steady trajectory into profitability, but who are unlikely to be incredible star, high-growth performers at that stage. In fact, it’s been said that the most popular AIM stocks for IHT purposes SOURCE: LSE SEPTEMBER 2017 NUMBER OF NEW IPOs BY SECTOR TRAVEL & LEISURE TECHNOLOGY HARDWARE & EQUIPMENT SOFTWARE & COMPUTER SERVICES SUPPORT SERVICES AEROSPACE & DEFENCE NONEQUITY INVESTMENT INSTRUMENTS ALTERNATIVE ENERGY INDUSTRIAL METALS PERSONAL GOODS CONSTRUCTION & MATERIALS ELECTRONIC & ELECTRICAL EQUIPMENT EQUITY INVESTMENT INSTRUMENTS REAL ESTATE INVESTMENT TRUSTS HOUSEHOLD GOODS LIFE INSURANCE MINING PHARMACEUTICALS AND BIOTECHNOLOGY GENERAL RETAILERS INDUSTRIAL TRANSPORTATION GENERAL FINANCIAL OIL & GAS PRODUCERS 0 1 2 3 4 5 6 AIM IPOs IN 2017 By the end of September, there had been 33 IPOs in 2017 across 21 sectors and from five countries. Most of the new IPOs were UK-based companies with only five coming from their international counterparts. The Oil & Gas sector had the highest number of new companies joining (five) which was followed by the General Financial (four) and Industrial Transportation (three) sectors. Although the Oil & Gas sector had the most IPO activity by the number of companies, the total value raised by this sector only rated ninth among the sectors. This reflects the point made in last year’s report that there are small minors on the AIM market which add volatility to the overall AIM index and undermine the performance of other sectors. Oil & Gas companies, particularly those in exploration and discovery appear to be taking the opportunity to become quoted at a time when they are well placed to benefit from a rising price after the price crashes of recent years. They also stand to do well from sterling’s weakness, as their earnings tend to be in USD but a portion of their costs are in sterling. And what makes them even more popular to potential shareholders is that many of these firms trade at a discount to their NAV 36 . Newly quoted companies in the Industrial Transportation sector had raised £654.9 million to the end of September 2017, making it the largest sector among the year’s IPOs. The General Financial sector was the second largest with a total market capitalisation of £464.5 million. Most of the value of the market cap of the Industrial Transportation sector was driven by the Eddie Stobart IPO, but the multiple firms quoted in this sector also reflect the increased demand for logistics services as retailers target ever shorter delivery times amid increasing competition 37 . The popularity of floating within the General Financial sector may be attributable to well performing firms amid the political turmoil; Euan Fraser, chief executive of Alpha FX Group plc which was quoted on AIM in April 2017, said that consultants were actually benefiting from Brexit in the short term as companies scramble for advice 38 . “Platform based solutions have helped open up AIM IHT investment for both clients and advisers, offering lower costs and ease of administration.” — MATT STRACHAN, THORNTONS INVESTMENTS “Five oil and gas producers quoted on AIM in the first six months of 2017” DIVERSIFIED GAS & OIL PLC, ECO (ATLANTIC) OIL & GAS LTD, SAFFRON ENERGY PLC, ANGLO AFRICAN OIL & GAS LTD, AND TOUCHSTONE EXPLORATION INC. are those that fit the ′boring′ mould rather than disruptors 35 . But the strong backing of IHT portfolios may well turn the ‘boring’ firms into much higher profile players in the growth space. The other consideration is the reality of diversification across IHT AIMmanagers when they are holding a number of the same stocks. Here, it is useful to consider that AIMmanagers generally hold between 20 and 30 different AIM shares at any one time, so their wider allocation is likely to provide a greater degree of diversification. Advisers may still find it useful, though, to take a look at underlying shareholdings. SOURCE: LSE AT SEPTEMBER 2017 INDUSTRIAL TRANSPORTATION EQUITY INVESTMENT INSTRUMENTS OIL & GAS PRODUCERS TECH. HARDWARE & EQUIPMENT NONEQUITY INVESTMENT GENERAL FINANCIAL REAL ESTATE TRUSTS PHARMACEUTICALS & BIOTECHNOLOGY SOFTWARE & COMPUTER SERVICES MINING GENERAL RETAILERS HOUSEHOLD GOODS CONSTRUCTION & MATERIALS SUPPORT SERVICES ALTERNATIVE ENERGY ELECTRONIC EQUIPMENT LIFE INSURANCE TRAVEL & LEISURE AEROSPACE & DEFENCE INDUSTRIAL METALS PERSONAL GOODS £654.9m £7.6m £700M £300M £600M £200M £500M £100M £400M £0M