Graduating from AIM to Main

Graduation to the Main Market tells the world that an AIM company has come of age and is ready to widen its investment pool and go to the next level. James Crux reports

Since AIM’s formation in 1995, more than 100 companies (102 to be precise) have graduated from the ‘junior market’ to the more onerous Main Market, or Official List, where regulatory, corporate governance and reporting criteria are more stringent – for starters, full list companies need to provide audited statements for at least three years and their market value must exceed £700,000.

With institutional investors often reluctant or unable to invest in illiquid AIM stocks, the Main Market can afford successful growth companies access to a wider pool of investors, as well as raise their profile in the City and further afield.

AIM to Main
Many ‘AIM-to-Main’ migrants have indeed rewarded investors with heady growth and healthy returns, though for every Domino’s Pizza UK & Ireland there is an Erinaceous (placed into administration during 2008).

More recently, the number of ventures moving from AIM to the Official List has increased. Nine graduated last year, with 12 making the jump in both 2008 and 2007. To put this in context, a mere trio shifted their listing in 2006 – IP Group, Accident Exchange and Connaught – albeit up from the two firms graduating in each of 2005 (Center Parcs and Melrose) and 2004 (PD Ports and the aforementioned Erinaceous).

Hungry for success
One of the biggest AIM-to-Main success stories is expanding pizza delivery company Domino’s Pizza, which migrated in May 2008. Floating on AIM in 1999, it had expanded from 190 to 501 stores by the end of 2007, during which time profits grew from £1.8 million to £18.7 million.

‘AIM had served us very, very well,’ recalls Lee Ginsberg, chief financial officer. ‘AIM did not hold us back particularly. In fact, the highest rating we ever had was on AIM. One of the reasons we considered moving was our sheer size. We were in the top ten AIM companies in terms of market cap.’

Domino’s decided to transfer north ‘because of the growth we had ahead of us. A move to the FTSE 250 was quite attractive to us and AIM was a little out of fashion at that stage, so we felt it was an opportune time’.

There were some disadvantages, recalls Ginsberg: ‘We lost some funds, but we gained others. Our IHT funds had to exit and some of them were disappointed. But we attracted tracker funds that now own 6 to 8 per cent. And on the full list there is a much greater base of shareholders that you can attract, particularly in the US. We already had some US shareholders on AIM, but that base grew once we became a full list company. US funds preferred us on the Official List to AIM, because there is a stronger perception of corporate governance’.

Domino’s expansive shareholder base now includes the likes of Standard Life and Chicago-based fund William Blair. As Ginsberg explains, ‘You do get the long-only funds and therefore more stability in your shareholder base. And our liquidity has picked up by between 20 and 30 per cent in terms of average daily volumes on the full list.’

Investors who bought Domino’s on AIM and have stuck with the business have been suitably rewarded, with cash aplenty returned in the form of dividends and the group continuing on its growth trajectory. Last year, pre-tax profits grew by 28 per cent to £29.9 million and the total dividend was upped more than 30 per cent to 7.8p. Based on estimates for 2010, pointing to profits of £33.5 million, earnings of 15p and a 9.1p dividend, Domino’s trades on a prospective p/e of around 23 times, a justifiable rating given growth rates.

Genus’s profitable graduation
Genus, the resiliently profitable animal genetics group that made £32 million on £280 million sales last year, kick-started quoted life on the old Ofex facility (forerunner of today’s PLUS Markets) in 1997. Under the guidance of charismatic CEO Richard Wood, Genus moved to AIM in 2000 and migrated to the Main Board in November 2007 having completed a transformational acquisition.

Musing on Genus’s march through the indices, Wood says, ‘Our aim has been to use the power of each of the markets we have been on in order to do bigger deals than we could have with debt-finance alone.’ Genus had all the reporting and corporate governance disciplines in place to become a full list company well ahead of its eventual move from AIM, but ‘we deliberately waited four years so that the tax breaks could go to our investors’, explains Wood.

In late 2007, Genus’s market value meant that it started its Main Market life outside the FTSE 250, ‘but as confidence grew and cash generation came through, our share price soared – six months later we went into the FTSE 250’.
Wood says that, for Genus, one of the key advantages of the Main Market is that ‘it offers a greater potential pool of investors. We now get to see the mid-market people as well as the small-cap people.’ Furthermore, ‘on AIM, nobody overseas would look at us. On the Full List they do. We now see the likes of Franklin Templeton in New York and Chicago, and we have European shareholders such as BNP Paribas and Deutsche Bank.’

Connaught continues to cheer
Like Genus and Domino’s, Connaught is another AIM-to-Main Market star that is delivering for investors. This social housing and compliance services provider began its corporate journey as a concrete repair specialist in Sidmouth in South East England and floated on AIM back in 1998.

A year later the company clinched its first-ever social housing partnering deal, with Gosport Borough Council, with revenues that year reaching £55 million. Connaught went on to acquire gas service and maintenance provider Gasforce in 2002, and in 2006 graduated to the Main Market.

The company continues to scale new heights, with turnover having grown 20 per cent to £660 million in the year to August and profits powering ahead 40 per cent to £42.5 million. More recent half-year results showed sales skipping 17 per cent higher to £355 million and pre-tax profits improving 20 per cent to £20.7 million. The half-year dividend was lifted 20 per cent to 1.308p.

Shares in Connaught, which sits on a near-£3 billion order book, are dividend paying and sell for less than 11 times earnings. As such, they are still nothing less than compelling.

Fresh graduates
Among more recent graduates is UK and European property investor Hansteen, floated on AIM with a £125 million funding by proven property duo Ian Watson and Morgan Jones in 2005. Now FTSE 250-listed with a £334 million market cap, still off pre-credit crunch peaks, its Main Board move enabled the company to convert to a real estate investment trust (REIT) with resulting tax benefits to the group and its shareholders.

One of AIM’s major success stories – listed on AIM in 2001, its market cap increased more than 60 times – gold producer Centamin Egypt was promoted to the Main Market in November and currently commands a £1.3 billion Official List price tag. This March, Indian power project backer KSK Power Ventur, which had floated on AIM in 2006 at 107p, debuting with a £138 million market cap, moved its shares to the Secondary List of the Main Market. KSK had come of age, with its AIM market cap having soared to more than £800 million.

Waiting in the wings
Scour the list of the largest AIM companies by market cap in the FTSE AIM 100 and FTSE AIM UK 50 indices and one can speculate as to who the next AIM-to-Main Market graduates will be. AIM giants that have signalled their intention to make the leap include online sports betting star Sportingbet, which will shift its listing on 14 May in a move representing a milestone for the online betting industry.

CEO Andrew McIver views the Main Market as the most appropriate platform for fast-growing Sportingbet, whose second-quarter numbers to January showed ‘amounts wagered’ up 26 per cent at £502 million and operating profits 8 per cent ahead at £11.2 million during one of the busiest periods for sports betting in Europe and Australia. Signing up record numbers of customers, the company could enter the FTSE 250 straight off the bat, based on its £346 million market cap.

Medusa Mining, the Australia-based gold producer focused on the Phillipines, is another set for a mid-May move. Boss Geoff Davis argues that Medusa, now valued on AIM at £519 million, is ‘now of a size and stature that justifies and qualifies its graduation from AIM to the Official List’. Davis decrees that the Main Board represents ‘an ideal platform’ to raise Medusa’s profile while widening its pool of investors.

Indian coal bed methane producer Great Eastern Energy is to switch to the Main Board via a ‘Standard Listing’ of its global depositary receipts (GDRs) at the end of this month. Since the admission of its GDRs to AIM in 2005, its market value has burgeoned to around £600 million, and, given its reserves and resources, operations and production profile, Great Eastern Energy thinks the time is right to ascend to the Main Market.

Investors should also watch out for accountancy group RSM Tenon, at which astute small companies mover and shaker Bob Morton occupies the chair, also on its way north at the end of May. In December, Tenon completed the biggest acquisition in its history, that of RSM Bentley Jennison, in a deal transforming its scale, geographical presence and service offering. ‘Enlarged’ RSM Tenon is forecast to deliver dramatically improved pre-tax profits of £23.2 million (2009: £12 million) for the current year to June. On forecast earnings of 6.7p, its income-yielding shares look good value on a prospective multiple of around seven times.

Avanti – all set for lift off
Selling satellite broadband capacity and services ‘business to business’ to telecoms companies around the globe, Avanti Communications’ share price continues to gain altitude on contract wins and market excitement. As such, the company, an AIM giant with a £353 million tag that analysts believe could double or even triple in the year ahead – one broker has set a lofty £13.80 price target – looks a leading candidate for a move to the Full List.

Avanti is the company behind HYLAS 1, which will be the first super-fast broadband satellite launched in Europe under a project advised upon by the European Space Agency. It is undergoing final testing and is set to be launched in the third quarter of this year.

Waiting in the wings is a second, larger satellite, HYLAS 2, for which debt and equity funding was completed in January. Earmarked for launch in 2012, HYLAS 2 will extend Avanti’s coverage to Africa and the Middle East.
Making great strides in selling capacity for its satellites – it recently announced a contract with a government customer for the sale of capacity on HYLAS 2 – Avanti shares are well worth buying and locking away.

Astute CEO David Williams is particularly excited by its market opportunity, based upon the ‘wider acceptance of the role that satellite has to play’ in managing the ‘explosion in data across all telecoms networks. We have a massive opportunity to provide the plumbing to telecoms companies, and the market for IP-transit is bigger than we ever figured.’