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AIM saw no fewer than 438 new companies join last year and witnessed its market value jump to £56.6 billion. James Crux releases the results of our third annual AIM survey

AIM celebrated its tenth birthday in style last year. Our third annual survey of the market shows that the number of companies quoted on AIM has nearly doubled over the past two years to 1,399 at the start of 2006. The market value of these companies has increased at a faster rate still, more than trebling to £56.6 billion.

2005 was a record year for new issues, with 438 companies joining AIM, raising a collective £5.67 billion. In addition 81 ventures were re-admitted to AIM following reverse takeovers, which pulled in a cumulative £791 million. Thus more money was raised on AIM at flotation in 2005 than was pulled in over the previous four years altogether.

Despite this frenetic new issues activity, the AIM Index had a more subdued 2005, rising just four per cent to 1,046.2. By contrast the FTSE All-Share increased an impressive 18.1 per cent, helped by the rocketing oil price and revived merger and acquisition activity amongst the blue chips. In 2004 the situation was reversed, with AIM jumping 20.4 per cent and the All-Share creeping ahead 9.2 per cent.

Our report goes beyond providing statistical information on the market, delving into issues such as the quality of companies on AIM. Our analysis uncovers those businesses that have performed the best and worst over the past year, by examining their share prices, as well as changes in sales and earnings.

We have also ranked companies by common valuation measures such as price-to-earnings, dividend yield and price-to-sales ratios.

Our research primarily comes from The AIM Guide, the comprehensive market directory produced by Growth Company Investor, and data collated from the London Stock Exchange.

The report could not have been completed without the professional help and assistance of leading law firm Hunton & Williams.

The best performing shares
Shell company Future Internet Technologies stands at the top of Table 1 charting the best performing shares of the year, after rocketing more than 1,000 per cent on speculation about potential reverse acquisitions. Recently Future admitted it was arranging a major placing and might invest in the voice over internet protocol sector.

Another shell to leap was Healthcare Holdings, which jumped 500 per cent before being suspended due to ‘early stage’ discussions ahead of a possible reverse deal.

Smaller natural resources plays, such as Egdon Resources, looking for oil on the Isle of Wight, are a strong feature of this table. So are companies related to the online gaming boom. For instance beleaguered software developer IQ-Ludorum has risen on the appointment of online transaction systems expert Mike Muscato as chairman.

Another company that has jumped on hopes of a revival is Ofex operator PLUS Markets, up more than 200 per cent in the last quarter of the year.

The worst performers
As mentioned above, the AIM Index underperformed the wider market last year. Overall 141 ventures left AIM during 2005, almost double the 77 businesses that exited in 2004. These are not included in Table 2, which showcases the worst performers of 2005, spread across a number of sectors.

A couple of these fallers have subsequently called in the administrators, after being unable to cope with their debts. These high-profile concerns were meat and pastry business Canterbury Foods, down 97 per cent, and magazine publisher Highbury House Communications, which former Sun Editor Kelvin Mackenzie was unable to prop up.

Several others have shelved their original business and are examining new strategic options. Former food manufacturer Readybuy is one of these.

AIM’s largest companies
AIM companies are getting larger: 46 now have a market valuation of more than £200 million (Table 3), compared with just 17 a year ago.

Online sports betting giant Sportingbet takes the top slot this year, after rising in value by 200 per cent to £1.4 billion. Last year’s largest company, Algerian gas prospector First Calgary Petroleum, has fallen in value by 28 per cent to £792 million after a failed takeover attempt. This puts it in sixth position this year.

Nevertheless, half of the largest dozen companies on AIM at the start of 2006, all of which are worth more than £500 million, are natural resources concerns. Amongst this crowd, financial concerns New Star Asset Management, electronic money venture NETeller and insurance company Lancashire also stand out. New Star has risen by 30 per cent since admission in November.

AIM’s largest sectors
Given that six of its number are worth more than £500 million, it is not surprising that natural resources concerns (mining and oil & gas combined) continue to make up the largest sectors on AIM by value (Table 4). Together, these 234 companies are worth £17.1 billion, or 30.1 per cent of the entire AIM market.

The most populous sector remains speciality & other finance, with 199 companies. This reflects the glut of shells that floated in the first quarter of 2005 ahead of change in the AIM rules restricting this. The financial sector also increased by value 177 per cent to £7.2 billion.

2005’s best IPOs
Table 5 shows the largest AIM flotations over the past year, in terms of money raised. A dozen have pulled in more than £100 million. Half of them were overseas property funds, mostly raising money on a pound-for-pound basis.

For example Dawnay, Day Treveria attracted £252 million to invest in German commercial real estate. Many others are focused on central and eastern Europe, such as Dawnay, Day Carpathian (£140 million), Raven Russia (£153 million) and Equest Balkan Properties (£140 million). The Ottoman Fund (£150 million) is looking at Turkey.

Sitting at the top of the pile is insurance concern Lancashire, which attracted £547 million in December. Other notable AIM fundraisings were Energy XXI, formed to make investments in the oil and gas industry, and John Duffield’s New Star Asset Management, which pulled in an impressive £103.6 million.

In terms of share price performance post float, as shown in Table 6, those that have risen the most tend to be penny shares, where tight spreads translate into huge percentage leaps. For instance Braemore Resources, which listed on AIM as a shell in March at 1p, has since sparked up 788 per cent, after buying a nickel producer.

Other small resources stocks sport huge gains in this table, such as Altona Resources, which like Braemore was also floated by Nabarro Wells. Altona has risen 613 per cent. Others include Resmex, Libra Natural Resources, Cordillera Resources and Max Petroleum.

One of the best-performing trading businesses was Debtmatters, a provider of individual voluntary arrangements, which has thrived on the back of rising consumer debts. The group floated on AIM at 65p in June and has more than doubled.

Fastest growing companies by sales
Many AIM companies’ principal motive for joining the market is to grow their sales, either organically or by using their quoted paper to effect acquisitions. Early-stage ventures dominate Table 7, which lists the companies with the fastest growing sales. A reasonably small increase at the top line for such companies with turnovers below £1 million can produce huge percentage gains.

This explains why compressor technology outfit Corac tops the table, after seeing its turnover rise from £10,000 to £730,000 after licensing income started to accumulate. Property concern Comland Commercial’s presence can be put down to a series of asset disposals.

Exceptional events can also result in major sales leaps. Spectrum Interactive’s 3,000 per cent vault from £520,000 to £16.97 million reflects the fact that the company consolidated the results of NWP Spectrum for the first time this year, prior to the group’s float. Underlying turnover growth at the subsidiary was a more modest seven per cent.

Many on the list regarded 2005 as a year of key progress in their business, which is why financial adviser Libertas Capital and media concern YooMedia saw their sales rocket. The progress at Clapham House was down to acquisitions made by ex-Pizza Express chief David Page.

Fastest growing companies by earnings
Table 8 shows a slew of ventures from a variety of sectors growing earnings at impressive rates for shareholders. The leader in this field is WH Ireland, the Manchester-based brokerage, highly active in the new issues market, which lifted earnings by a voracious 2,875 per cent between 2004 and 2005.

The likes of ATH Resources, United Carpets and Shed Productions also posted huge earnings leaps and, again, 2005 proved a great year for Sportingbet shareholders, where earnings burgeoned by 415 per cent to 13.4p, following the purchase of Paradise Poker.

To qualify for inclusion in this table, the company must have registered positive earnings in 2004.

Lowest p/e ratios
Table 9 illustrates the AIM companies with the lowest price-to-earnings ratios based on brokers’ estimates for their next set of annual results. These results need to be treated with caution. Many smaller companies only have one broker producing intermittent research on their prospects. Some of these estimates may be out of date following profit warnings and give a false impression of the company’s value. Many of the constituents of this table fall into this category.

For instance, Matrix Communications, which warned on profits in September, trades on a p/e of less than one, and furniture supplier Collins and Hayes is on a forward p/e of just 1.8 – at the interim stage, sales dropped by 19.1 per cent and profits slumped from £500,000 to £200,000. Others in this camp include Celltalk, which has just posted poor interims, PKL, Advanced Fluid Connections and Landround, all of which had profit warnings.

Two making business progress which might exhibit a genuine low rating are recruitment concern Multi and ethanol producer Renova Energy.

Highest dividend yields
Only a small proportion of AIM companies pay dividends, roughly a tenth, with many preferring to reinvest earnings in developing their business. Nevertheless, as Table 10 demonstrates, over 20 companies offer a dividend yield greater than the current base interest rate of 4.5 per cent.

Again, companies that have recently issued profit warnings feature habitually in this table. Many of these might choose to reduce, or scrap, their dividend if their earnings are under threat. One that looks more solid is property developer City Lofts, offering investors an improved yield of 9.2 per cent.

Note that Premier Direct only appears in this and the previous table because it has recently split its shares on a five-for-one basis.

Lowest price-to-sales ratios
An analysis of a company’s market value compared with its sales provides a crude measure of value. Many of the constituents in the higher echelons of Table 11, which measures companies with low price-to-sales ratios, are either businesses that have thus far failed to set AIM alight (note the presence again of the collapsed Canterbury Foods) or businesses in the midst of restructuring.

Following a strategic shift, Pittards, the producer of leather for gloves, shoes and sports equipment, is in the midst of reducing costs and borrowings and rebuilding its sales – first half losses came in at £1.5 million, and the company’s £1.77 million valuation gives a price-to-sales ratio of 0.02.

At the other end of the scale (Table 12), 14 ventures are valued at over 1,000 times sales. These tend to be highly speculative concerns in sectors such as resources or technology, often loss-making with minimal revenues.

Energy counter Egdon Resources trades on a price-to-sales ratio of 7,029.45 – turnover for 2005 was a mere £11,000, yet the company is valued at more than £70 million on strong prospects. And well-regarded fuel cells concern Ceres Power, which lost £2.7 million on £71,000 sales last year, yet commands a price-to-sales rating of 1,123.

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