Christopher Spink's Pick of AIM

Central and Eastern Europe is one of the fastest growing economic areas in the world. The annual increase in their economies isn’t quite at the levels of China and India, but it is almost 50 per cent greater than the UK, and ten times the level of the sluggish ‘Eurozone’.

The major economic boost to this previously totalitarian stronghold occurred last year following entry into the EU of Poland, the Czech Republic, Slovakia, the Baltic States and four others. Interest rates have fallen, GDP is rising and an array of Western European companies are taking advantage of the low labour costs in the East to relocate or outsource their manufacturing requirements there. This will, in due course, decrease their costs, improve their margins and boost their profitability.

The first wave
AIM companies have headed for this area en masse. Mobile phone repairer CRC has switched much of its work to a factory in western Poland near the German border. It expects this to pay off handsomely.

Credit card maker ID Data, which has recently been forced to raise £4 million at a lowly 1p a share, has moved a plant from a location in Sussex out to Poland in April to help cut costs.

One of AIM’s golden shares – cake maker Inter Link Foods – has gone one further and actually acquired, last December for £1.2 million, an existing business in Poland. Inter Link’s rationale was that this bakery could make products that could be shipped to the UK within 24 hours, thus boosting the group’s capacity and overall margins.
And then there is Coffee Heaven, the Polish, Latvian and Czech Republic coffee bar operator, which has apparently broken even at an operating level as its expansion continues apace.

Such has been the investment injection that the Polish stock exchange has risen 48 per cent over the past year. Fellow new entrants have seen similarly great returns, with the Czech Republic leading the way with an 87 per cent rise, Estonia putting on 78 per cent and Hungary leaping 76 per cent.

Bulgaria looks attractive at last
While all of the companies mentioned are interesting investment options, you should also be looking at the next wave of countries lining up to join the EU – and the rash of investment companies on AIM that are targeting this area.

Bulgaria appears to be the destination of choice for such ventures. Last December Bulgarian Property Developments pulled in £4.5 million to acquire sites for commercial development near the capital Sofia, as well as a ski resort.

Earlier this year the Black Sea Property Fund raised £50 million to finance a structured plan to invest in coastal leisure developments in Bulgaria.

In the past month two other companies have attracted significant backing. European Convergence Property raised €62.7 million to invest in all types of property in south-east Europe, encompassing Romania and Turkey as well as Bulgaria. And Orchid Developments’ £20 million placing was four times oversubscribed, even after the original offering was increased by 50 per cent!

Orchid, brought to the market by Shore Capital, will benefit from a €30 million low-interest loan secured from the European Bank of Reconstruction and Development. This is the first of its kind in the Bulgarian real estate market. Orchid already has two Black Sea hotels operating as well as two residential and three commercial developments, one of which will house the Porsche showroom in Sofia.

At 112p, the AIM shares are trading at an 18 per cent premium to the 95p placing price. Black Sea and European Convergence remain nearer their starting prices. All are worth investigating further.