AIM for £10m and under

In its 11 years of existence, AIM has been thoroughly revolutionised. At the end of 1995 it sported around 80 companies and had a combined market value of under £100 million. Now, following a deluge of new issues these past 15 months – 530 companies have joined, raising an amazing £7.4 billion – there are 1,483 companies on AIM taking its market capitalisation to over £65 billion.

Its growing popularity among entrepreneurs, deal makers and investors from all sectors and from all over the globe (the regulatory, tax and fundraising attractions are nothing less than unrivalled!) has also led to an influx of larger and generally more developed companies. As things stand, the average market cap of an AIM company is £44 million.

In 2002, it was around £15 million, while way back in the early days of 1995, it was less than £10 million. Moreover, the six largest constituents – Sportingbet, New Star Asset Management, Sibir Energy, Peter Hambro Mining, First Quantum Minerals and Bema Gold – are worth over £1 billion, while almost 135 are valued at £100 million-plus, and a further 150 sport values of between £50 million and £100 million.

It’s fair to say that these ventures – some of which have performed exceptionally well – now get the lion’s share of attention from investors and commentators, leaving all the other minnows to fight it out among themselves for the residual interest of the market.

This, however, shouldn’t unduly worry small cap investors, because it means that very often, you are able to uncover unloved, ignored and (if you’re lucky) fundamentally undervalued ventures just waiting for the right people to realise the true value of their assets.

Soccercity – worth more, and possibly a target to boot
Soccercity is a tiny business with the potential to truly burst onto an intriguing sub-sector of the leisure market. Valued at a miniscule £970,000, it was actually the first five-a-side football operator to launch on AIM (it joined as a cash shell called Taskcatch) back in 2003. A series of acquisitions means it now operates four five-a-side facilities in Leeds, Bradford, Huddersfield and Southampton, with 21 pitches in all.

Around 10,000 players use the football facilities each week, paying about £5 a time for the privilege. To increase the utilisation of its centres outside of the normal 5-9pm football hours, it introduced ‘Funcity’, a children’s adventure play centre concept that has proven remarkably profitable.

Subsequent flotations of rival five-a-side players Goals Soccer Centres and Powerleague have, however, put Soccercity in the shade. But 2007 estimates from David Youngman of broker WH Ireland leave its shares looking significantly undervalued.

Sales are expected to rise 17 per cent to £2.1 million this year, with a £200,000 loss, but next year the group is expected to move into the black on 22 per cent revenue growth to £2.56 million. At the present 2.75p, the price-earnings multiple for 2007 is 9.5. For comparison, Powerleague trades at 14.8 times its 2007 earnings and Goals Soccer at 11.2.

As Youngman points out, ‘the possibility of generating additional profits with the same level of central costs by developing more centres clearly adds to the attractiveness of these shares.’ In all, the group intends to create ten Soccercity centres in the short to medium term. Each new centre would require £500,000 to fit out, but once it reached acceptable utilisation rates, it would generate earnings before tax of around £230,000 a year.

Chairman Norman Molyneux says three centres are ‘under evaluation’ and he hopes to complete the purchase of one this year. With listed rivals opening at much faster rates, Molyneux confirms discussions with brokers about a potential fundraising to speed up the roll-out are ongoing. On top of all this, it is not beyond the realms of possibility that either of its larger listed rivals might step in with an attractive bid.

Atlantic to go global on PPM
At just £4.3 million, business software provider Atlantic Global is worth at least a second glance. It hasn't had a fantastic time since listing but recent results drew a line under a tough year and within those figures, there was more than a chink of light shining through.

For example, one area into which the company has spread itself is ‘Project and Portfolio Management’ (aka PPM, a new-fangled management tool that enables executives to keep an eye on the ‘big business picture’) with its proprietary ‘Corporate Vision’ software. In its full-year statement, the group said it was witnessing its highest ever levels of ongoing ‘face-to-face sales contact’ and ‘PPM customer activity’.

Adding a degree of legitimacy to Atlantic’s hopes of benefiting handsomely from this area is industry research expert Gartner. It has already ‘recognised’ Atlantic’s burgeoning presence in this embryonic area, confirming that its software solution is proving ‘successful.’

Atlantic’s managing director Eugene Blaine believes his company has a very competitive product offering and has made ‘the necessary changes to position the business to take advantage of forecast growth in the PPM marketplace. The future will present significant opportunities and, as with any fast growing company, will also present significant challenges’.

New contracts were signed in the period with foreign exchange firm Travelex and mobile operator Orange. Additional licenses were taken by Telewest and Norwich Union. This resulted in record sales in the second half and added to a customer base that already included the likes of AstraZeneca, GlaxoSmithKline, Virgin Mobile, Friends Provident, Barclays Bank, HSBC and the Metropolitan Police.

Current year forecasts from house broker Collins Stewart point to profits of £500,000 from sales of £3.2 million. On EPS of 2.0p for 2006 and a p/e of 9.5, the shares look inexpensive. The net cash position stands at £1.5 million. ‘Thus,’ opines analyst Stephen Ford, ‘if the company regains credibility with investors with some further contract wins, we expect the price to recover.’

Bits biting into online gambling
Another software developer worthy of your attention is Bits Corp, a company focused on the video games sector. At the current 16p, some distance from its 60p issue price in
September 2000, it is capitalised at just £9.1 million.

Interims to end-September 2005 showed a small loss after turnover crumbled from over £1 million to a meagre £285,000. But this reflects the investment made by the group in the development and leveraging of new technology for an exciting departure from its usual domain. And, having now completed a £1.5 million share placing, with a £1.5 million convertible loan in place if needed, Bits is ready to set in motion this potentially huge project.

The new cash enables Bits to take advantage of agreements with two online companies to provide internet gaming using its video games expertise. An inaugural product and website are expected to launch in the second quarter of 2006, with revenues predicted to come in during the third. There are also ‘a number of other development opportunities’ in the pipeline, in its traditional video gaming market and the internet gambling arena. High-risk stuff, but it could reward the brave.

Cheap TripleArc eyes recovery
Print management specialist TripleArc was something of a Growth Company Investor favourite until a profit warning last July sent the shares tumbling from highs of around 23p to below 4p, giving TripleArc a meagre valuation of £7.8 million.

However, the reason for the warning was the poor performance of the direct mail division of its £640,000 million acquisition Stream. This difficult asset has now been sold (it was offloaded for £1), and the attendant cancellation of an earn-out payment eliminated £900,000 of liabilities from the balance sheet.

The other good news is that the group made enough cash to pay down £500,000 worth of debt. With the remaining business now streamlined and looking likely to thrive, house broker Altium Securities expects £500,000 adjusted profit before tax for the year to December 2005 leading to 0.2p of earnings.

But 2006 is where the difference will be seen: £3.2 million of profits are forecast, with earnings of 1.2p producing a miniscule p/e ratio of 3.1 times. Very cheap indeed. Buy.

Scots pub deal to drive Dipford north
Formed four years ago to consolidate the middle tiers of the business broking market, Dipford is now one of the largest sellers of country hotels and pubs in Scotland after buying north-of-the-border counterpart Bruce & Co for up to £3.6 million. Capitalised at a very lowly £5.9 million, this is a significant deal for the Exeter-based business, which made £317,000 pre-tax in the year to last April, on £4.7 million turnover. Bruce made almost double this, £612,000, in the year to September 2004 on £965,000 turnover and had £654,000 cash at that stage.

Chaired by John Custance Baker, Dipford had approximately 2,000 businesses for sale before it acquired Bruce and is the second largest business broker in the UK, with over a thousand buyers registering every week. Analysts forecast a pre-tax profit of £1 million this year and £1.3 million in 2007.

All of this should translate into earnings growth of 185 per cent to 6.9p for the year to April and 8.35p for 2007, meaning the shares trade at multiples of nine times and 7.5 times earnings. The company didn’t pay a dividend at interim but the broker predicts 1.4p in 2006, meaning the shares yield 2.2 per cent. Worth snapping up.

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