AIM Industry Report 2017/18

30 31 REAL EXAMPLES ECSC GROUP PLC floated its shares on AIM in December 2016 having been founded in 2000 as a provider of cyber security services. VCTs managed by Artemis and Unicorn invested in it at that point, with their funding helping the company to hire specialist staff (with headcount up from 57 to 98) and grow its business. It opened facilities in Leeds, Australia and London in 2017 58 . The company’s first six months on AIM saw revenue growth from £1.9 million, up from £1.8 million the year before, but a drop in pre-tax profits associated with scaling up the business. Despite this, CEO Ian Mann remains “confident” about ECSC’s growth strategy “given the long-term opportunity in the cyber security market 59 .” FREEAGENT also floated on AIM in late 2016. The Edinburgh-based provider of online accounting software for microbusinesses, particularly those with little financial or company administration knowledge, had previously raised capital from angel investors and crowdfunding. Nevertheless, despite securing annual revenue increases of 30-40%, the company needed additional funding to achieve profitability. Amati VCTs acted as cornerstone investors to the float and gave FreeAgent the opportunity to scale that it is unlikely to have had otherwise 60 . In October 2017 the company reported a revenue increase from £3.6 to £4.6 million over the previous year and while it had not yet broken into profit, a strong gross profit margin of 80% and increasing consultancy fees promised improved future results 61 . HORIZON DISCOVERY GROUP PLC provides research tools to support genomics research and the development of personalised medicines. Parkwalk invested in the company in 2013 via its EIS fund and the company floated on AIM in early 2014. In a September 2017 release, Horizon Discovery stated that it expected to make up to £41 million in revenue in 2017 62 , up from £6.7m in 2013. Acquisitions have also increased Horizon Discovery’s workforce to 300 across sites in Cambridge (UK), Cambridge (Massachusetts), St Louis, Missouri, Boyertown, Pennsylvania (all in the United States) and Vienna (Austria) 63 . DIVIDEND INCOME AIM is primarily intended to be a market for growth stocks and companies. Consequently, it’s not unreasonable that many AIM-quoted firms are still ploughing the bulk of their profits back into the business to maximise growth potential. Others are still in the early stages of their journey to build revenues and profits. That said, the reality is that, contrary to popular belief, there is a wide choice of companies on AIM that provide good income. This is a good indication that they are generating cash and confident about their own future. Sustainable dividends are more likely where pay- outs appear to be well covered by earnings and while there are many AIM companies whose dividends may not be significant or reliable, there are also a large number with attractive and growing dividends 64 . The unpredictable nature of dividend safety and sustainability, even in large companies, should not be ignored. AIM stocks can also be less resilient when problems occur: with less resources when trouble does hit, dividends may be less than secure 65 . However, the nature of the companies on AIM means that careful income investors can benefit from impressive and speedy dividend growth, while their investees also grow their capital value. Real examples Lok’nStore Group PLC, an AIM- quoted self-storage sites operator did not initially pay dividends, but it has done so since 2007 and they have grown rapidly from 0.67p a share to 9p a share in 2016. In order to continue to grow, the company regularly invests in new sites, but loan to value is 20.8% and there are spare funds available from the bank facility 66 . Its H1 2017 performance was strong with like-for-like revenue for the year ended 31 July up 5.5% and self-storage unit occupancy up 6.5% 67 . The interim dividend to 31 July 2017 was 3p, up 12.4% from 2016 68 . Tristel PLC, infection and contamination prevention company, is highly cash generative and benefits from particularly strong overseas markets. In the year to June 2016, revenues grew 12% to £17.1 million and in 2017 they reached £20.3 million, a 17% increase. The net cash position for 2017 was £5.1 million, a decrease from £5.7 million in 2016, but the company remained debt free. Tristel paid special dividends of 3p a share in 2015 and 2016 due to strong cash flow. Standard dividend per share for the full year (2017) increased by 21% to 4.03p (2016: 3.33p) 69 . BREXIT AIM SINCE THE VOTE RETURNS, VOLATILITY AND RISK The table shows that, in the year to October 2017, which includes the period in the aftermath of the Brexit vote as well as the general election, the FTSE AIM All-Share index was less volatile, better performing and has a better return/risk ratio than the FTSE All-Share index. The same applies over a three-year period, which includes the Brexit vote itself. One of the reasons for this may be that firms on the main market are more likely to employ hedging against currency fluctuations, so not only are the shares of FTSE companies which have overseas income more resilient to negative issues caused by a strengthening pound, but they are less responsive to the benefits of a weakening pound. LIQUIDITY An analysis of LSE statistics found that among the top 25 most active AIM stocks from June 2016 to October 2017, there was an increase of almost 80% in the number of trades in that period – jumping from 360,436 to 646,737. The value of those trades also grew by almost 184% from £1,372.14 million to £3,890.08 million. The volume of shares traded increased massively overall, although somewhat less uniformly than the previous two statistics 70 . This indicates a growth in liquidity and that the Brexit vote did not have a significant negative effect on liquidity. The biggest driver seems to have been a major uptick in dealing in oil and gas, energy and resources stocks from January 2017. It is therefore unlikely to be a coincidence that the spikes in the share volumes generally follow peaks in oil and gas prices. Oil prices have been pushed up by output cuts by the world’s largest oil states in 2017. ANNUALISED RETURN % VOLATILITY % RETURN/RISK RATIO % 1 YR 3 YR* 5 YR* 1 YR 3 YR 5 YR 1 YR 3 YR 5 YR FTSE AIM ALL-SHARE 28.1 14.6 9.6 6.0 9.9 10.5 4.5 1.4 0.9 FTSE ALL-SHARE 13.4 9.4 10.2 8.1 14.0 9.5 1.6 0.7 1.1 SOURCE: FTSE AIM AND FTSE FACT SHEETS, 31 OCTOBER 2017 *Compound annual returns measured over 3 and 5 years “We look at the more liquid end of the market, companies with a market cap of over £50 million, so if we change our mind we can get out of a business.” — JUSTIN WAINE, PUMA INVESTMENTS AIM TOP 25 MOST ACTIVELY TRADED SHARES BY TRADES NO. OF TRADES 100,000 200,000 300,000 400,000 500,000 600,000 700,000 0 JUN 16 DEC JUN JUL JAN 17 JULY AUG FEB AUG SEP MAR SEP OCT APR OCT NOV MAY TOTAL VALUE OF TRADES (m) JUN 16 DEC JUN JUL JAN 17 JULY AUG FEB AUG SEP MAR SEP OCT APR OCT NOV MAY £4,500m £4,000m £3,500m £3,000m £2,500m £2,000m £1,500m £1,000m £500m £0 SOURCE: LSE NO. OF SHARES TRADED JUN 16 DEC JUN JUL JAN 17 JULY AUG FEB AUG SEP MAR SEP OCT APR OCT NOV MAY 30m 25m 20m 15m 10m 5m £0