AIM is a veritable value haven

Growth Company Investor’s latest unique investigation into all things AIM – Spotlight on AIM 2010 – of which this feature forms but a part, is essential reading for the value-focused investor. Shedding light on London’s junior market, whose benchmark AIM All Share Index has risen by around 20 per cent over the past year, the report assesses 1,214 companies, dramatically down from peaks of more than 1,700 ventures seen on AIM during a buoyant 2007, before the financial crisis engulfed global markets.

Bagging bargains
Severe numerical retrenchment, twinned with the simple fact that so many AIM stocks remain under-researched, overlooked and undervalued, reveals itself in a current collective AIM market capitalisation of £60 billion, significantly south of the all-time high of over £100 billion that was reached at the height of the 2007 bull market.

Chief among our findings is that value is to be found in abundance on AIM, where 45 per cent of the market trades on less than one times sales and the average market capitalisation has fallen to a modest £49.43 million, even with the large outliers included.

A total of 1,067 companies, 88 per cent of AIM, are worth £100 million or less, 944 (78 per cent) are valued at £50 million or less and 39.8 per cent, some 483 ventures, are priced at £10 million or under. Given this backdrop, there are clearly bargains to be had.

Profitable growth for a paltry p/e
Table 1 (opposite) highlights those companies that trade on the lowest (historic) price-to-earnings ratios. Lagan Capital, at the head of this table, trades on a minuscule 0.1 times earnings, with its shrunken p/e multiple owing much to the uncertainty created following its 2009 transformation from healthcare IT solutions provider IMS Maxims into a cash shell. Lagan has since gone on to invest in two Irish concerns, Evolving Outsourcing, looking to grow in the Polish call centre market, and software concern Ocuco.

Metals explorer Niger Uranium is another languishing in the p/e doldrums, as does Asian Growth Properties, the Hong Kong-based property developer on a p/e of 0.2. Urology specialist Plethora Solutions sells for only 0.4 times latest annual earnings, a grudging rating reflecting interim losses and a rather lumpy earnings profile.

Companies sitting atop Table 1 may well trade on the lowest p/e ratios, but more often than not, they do so with good reason, having irked investors or failed to inspire the market. However, by trawling further down this illuminating table, provided in full in our comprehensive report, we have identified a good number of proven, profitable businesses clearly trading at ‘the wrong price’.

RCG, the biometrics and RFID (radio frequency identification) solutions group focused on South-East Asia and Southern China, trades on 2.1 times historic earnings. This rating belies positive progress and growth prospects, with RCG having reported 6 per cent improvement in pre-tax profits to £40.7 million in the first six months of 2010, as new contract wins drove sales 12 per cent higher to £122 million.

Also unfairly unloved is Plastics Capital, a recent 49.5p, at which it sells on 5.7 times forecast earnings of 8.7p, whose miserly multiple reflects overcooked debt concerns. Nevertheless, the profitable niche plastics play is on course to meet market expectations for the year to March, with analysts looking for sales recovery from £26.7 million to £30 million and profits progression to £3.3 million (2010: £3 million).

Plastics Capital, whose management team has plenty of skin in the game, is seeing numerous new business wins and volumes are recovering to pre-economic crisis levels. Debt levels are reducing and Plastics Capital offers exposure to the growth stories of China, India and Brazil. As such, its shares represent an astute economic recovery bet.

Scour the ranks and you will also find other high-quality ventures trading on inexplicably derisory ratings, among them H&T (historic p/e of six), the expansionist pawnbroker which grew interim profits 71 per cent to £14.5 million, Morson (6.1 times historic earnings), the resilient technical staffing concern, and Clyde Process Solutions (p/e of 7.8), the profitable pneumatic conveying and air filtration solutions provider with contract momentum behind it.

Cash-rich counters
Amid this multitude of low price-to-earnings stocks lurks a litany of cash-rich concerns, whose cash often equates to a considerable proportion of market value, meaning that their actual trading operations are going for nothing less than a song.

Construction services venture Interior Services Group (ISG) trades on 5.3 times earnings, grudging given that annual numbers to June revealed profits of £12 million and £31 million net cash on the year-end balance sheet, equating to almost half its £66 million market value. At 200.5p, shares in ISG also offer a yield of around 7 per cent based on last year’s 14.34p dividend payment.

Ten Alps’ growth may have been curtailed by the recession, yet the multimedia specialist still made £3.2 million pre-tax last year and, as of March, cash balances stood at £6.7 million. With this in mind, a present AIM tag of £8.1 million, on shares recently priced at 11p, reflects deflated sector hopes rather than Ten Alps’ fundamentals.

Last, but by no means least, shipbroker ACM Shipping – a recent 216p – swaps hands for around 7.4 times its historic earnings. The market is missing a trick, since ACM has been profitable in every year since its formation, is debt free and had £4.3 million cash on its balance sheet at the end of March.

Express growth
Our full report furnishes investors with tables breaking down the market’s fastest-growing companies by sales, profits and earnings.

Heading up the pack in terms of sales growth is drug discoverer ImmuPharma, which reported £22 million revenue for 2009, a massive year-on-year rise from £60,000. Rather than pure growth, this leap at the top line reflects the receipt of a $30 million licence payment from US pharmaceutical giant Cephalon for Lupuzor, ImmuPharma’s treatment for chronic autoimmune disease lupus.

Another sales high-flyer is Oak Holdings, looking to create ‘one of the largest undercover, leisure-based, resort and convention destinations in Europe’, in Yorkshire no less. Revenue at Oak rose from just £25,000 in 2008 to £762,000 for the year to October 2009, driving a return to profitability following the company’s strategic repositioning from property developer to a revenue-generating leisure business.

Of more interest to the investor is Table 2, which displays the fastest-growing ventures by profit, a list headed up by one of this year’s new issues, the Malaysian data centre services provider CSF. Maiden annual results to March showed profit before tax increasing markedly to 44.5 million ringgits (£9 million), up from £100,000 a year earlier, though this profits leap in part reflected a large one-off gain arising from a sale-and-leaseback transaction, as well as 15 per cent top line growth to £11.3 million.

Profits are motoring ahead at consistent performer Vertu Motors, the eighth-largest motor retailer in the UK, steered by CEO Robert Forrester. Interim results to August showed pre-tax profits speeding 73 per cent higher to £4.9 million, as turnover raced ahead 27.3 per cent to £511 million. Vertu shares, at a recent 32p, look good value, trading at a discount to net assets of 46.8p and with the cash-generative company set to commence paying dividends in January. Swapping hands for around ten times historic earnings, Vertu should be on your radar.

Acquisitive growth accounts for the fast-paced progress made by veterinary services concern CVS, which has since seen its share price plummet on more than one earnings alert. Yet the deal-hungry CVS, the largest national operator and consolidator of veterinary practices, still features prominently in the table, thanks to a profit surge from £120,000 to £4.4 million reported for the year to June 2009.

Table 3 illustrates the most significant earnings per share (EPS) increases and is topped by investment bank Shore Capital, on account of a 271,700 per cent surge to 27.18p posted for 2009. This stratospheric EPS advance, however, owed much to the quirks of accounting, since it included a credit from negative goodwill pertaining to the acquisition of German property business Puma Brandenburg in September 2009, which Shore went on to de-merge.

Elsewhere at the top of the table, one finds spread betting products provider WorldSpreads, where earnings soared 2,750 per cent north to 4.67p in the last financial year, as operating profits advanced 666 per cent to more than 3 million. WorldSpreads, which arrived on AIM in 2007 and has consistently delivered growth in terms of trades and new clients while expanding overseas, is certainly one to watch.

Best-performing shares
Spotlight on AIM 2010 also highlights the best share price performers of the past year, a snapshot of which is provided in Table 4 (below). Software Radio Technology (SRT), the fast-growing provider of maritime identification and tracking technologies, saw its shares surge 605 per cent higher on a wave of new orders and strong financial progression.

SRT, which reported revenues increased 41 per cent to £3.56 million and losses pared by 81 per cent to £221,000 in a transformational year to last March, is now generating profits and cash and made £448,000 pre-tax profits in the first quarter of the current year.

The second most impressive price performer was Lupus Capital, which supplies building products to the door and window industry. Its shares leapt 398.46 per cent higher, with the main catalyst being the appointment of new management under the well-followed Jamie Pike as chairman. Lupus, well placed to profit from recovery in global residential housing markets, has addressed its debt issues and reported 43 per cent growth in half-year operating profits to £17.3 million.

Excitement surrounding the long-term fundamentals of the ethanol industry accounts for the stellar 386.27 rise at GTL Resources, the US-based bio-refining play whose latest annual financials showed a swing from losses
of $18.4 million to $14.5 million profits on turnover up 50 per cent.

Also notching up stratospheric gains was the world’s largest and most advanced video search engine, Blinkx, whose shares soared 347.37 per cent as investors responded to its rapid growth rates and key milestones met. During the six months to September, sales at Blinkx, with $17 million cash in its coffers at the last count, doubled to $27 million on the back of burgeoning video searches and advertisements served.

To pre-order the full report, Spotlight on AIM 2010, for a special rate of £236 plus VAT, please contact Samantha Hay on 020 7250 7039 or email samantha.hay@vitessemedia.co.uk