AIM's frozen IPO pipeline

Not a penny of new money has been raised on AIM since mid-November and 2009 has seen just one IPO on the market, making last year’s efforts look positively torrential.

The latest research from Growth Company Investor, produced in association with leading law firm Dorsey, revealed last year saw a 69 per cent fall in the annual number of AIM arrivals to just 70 companies.

2009’s sole AIM float so far is Singapore-based ship owner Yujin International, introduced by broker Seymour Pierce without raising any capital. AIM followers, starved of new meat, have demonstrated early appetite for the shares, chasing the price of this cash generative newcomer up from 33p to 45p.

This is stark evidence that the squeeze on new issues seen last year has gripped even tighter, as investors reallocate resources away from the perceived higher risks of small caps.

This slowing of AIM’s previously gushing torrent of IPOs, which at its 2005 peak resulted in 438 new issues, meant companies’ ability to raise cash was severely curtailed. With funding running almost completely dry in the latter months of the year, just £902.9 million was raised, representing an 86 per cent fall from the £6.25 billion drummed up for AIM hopefuls in 2007.

Drilling deeper into the statistics, we find a mere 40 new companies, or 57 per cent of the overall total, were able to raise any new money at all as part of their IPO, compared with the 83 per cent of new companies that attracted funds in 2007. The average AIM newcomer pulled in just £12.9 million of cash on flotation – less than half of 2007’s £28.1 million.

A tale of two halves

Our research demonstrates a year of two distinct halves, since only two of the 20 largest fundraisings occurred in the second half, and each of those in July. After £802 million was raised in the first six months, the latter six saw brokers drum up a mere £101 million.

Two new entrants – investment funds Terra Catalyst in February and KSK Emerging India in June (though it was wound up at the request of shareholders, with the intention of returning all remaining funds, in January 2009) – managed to drum up more than £100 million of new money, and 13 others attracted at least £20 million – again, none after July.

However, there were 15 introductions where no money was raised in both the first and the second halves of the year.

The largest companies to join AIM last year paint a similar picture, with only four of the 20 biggest arriving between July and December.

Gas explorer Indus Gas, a £300 million market cap, India-focused venture that joined in a £25 million fundraising run by broker and adviser Arden Partners, briefly swelled in value to over £400 million in sanguine summer trading. Since then, however, the company has lost a net 30 per cent of its original value.

Another, the second-largest, Qatar-based construction specialist Panceltica, has lost more than 80 per cent of its £268 million initial value since March.

Indeed, having joined the stock market, the majority of newcomers have had a bumpy ride, suffering an average share price fall of 34.5 per cent since listing. Significantly, this average was dragged down by 30 companies that suffered price declines of at least 50 per cent, of which nine saw their shares fall by more than 75 per cent.

Bulls in the bear pit

In a period characterised by volatile stock market swings, downwards more often than not, any share price rise is worthy of praise, and 12 such AIM newcomers deserve plaudits (see Table 3).

They are led by JSJS Designs, a purveyor of futuristic-sounding ‘home automation systems’. Introduced to the market without any new funds at 2p, shares in JSJS rose to 3.5p for a 75 per cent gain, moving its market value north to £7 million.

The group generated a modest profit from sales of £857,000 last year, but potential investors should be mindful that similar technology and management fared less well, under a previous loss-making AIM incarnation as SRS Technology. The company’s exposure to discretionary spending means the shares offer significant risk in the current recessionary environment.

Second-placed riser Animalcare, focused on the supply of veterinary medicines and other products into the livestock and companion animal markets, shifted its listing from PLUS to AIM at the start of 2008 following the £13.4 million cash-and-debt acquisition of the veterinary medicines arm of fully listed Genus. Still trading on an undemanding rating, despite recording a 59 per cent price rise since float, it looks well placed due to the defensive nature of the companion animal health market.

Likewise, similarly focused US player Phibro Animal Health, itself showing a respectable 4.4 per cent gain since its £22.6 million Panmure-advised IPO, may outperform again this year.

Beware falling stocks

Last year’s gainers were far outnumbered by the fallers. In fact, 14 companies, 20 per cent of the year’s new issues, saw their shares fall in value by over 70 per cent and a further 34 fell by at least ten per cent.

The worst performers (see Table 4) are headed by Dowgate Capital-advised Turftrax, which was forced to call in the administrators only six months after its £3.2 million flotation. By the end of the year its shares had lost investors – including billionaire financier Michael Spencer – virtually all of their money, having fallen 99 per cent from 40p to 0.4p.

Similarly bombed-out is communications sector recruiter 1700 Group, originally floated in early 2008 as Steppingstone in a £1.1 million IPO before management realised that another better-known recruiter had already claimed a strikingly similar name. The company spent a painful 12 months on the market, with its shares falling 94 per cent, before delisting in December to preserve cash and ‘reduce the costs associated with the completion of any future acquisition’.

Other notable failures included Kazakhstan-focused phosphate fertiliser hopeful Sunkar Resources, which floated on AIM with a £192 million price tag in June, following a £33.6 million placing at 120p, but soon began a 92 per cent slide down to just 9.25p, with widening losses hastening its descent.

Worth £120 million on arrival, engineer TGE Marine has seen its share price decline by 84 per cent since its £23.7 million IPO, with a profit warning in November resulting in further reversals. Oil and gas explorer Resaca Exploitation, which arrived with a £158 million valuation in July, has fallen the same amount since its own £53.3 million funding, yet management sees this as a product of the falling price of oil and has therefore delayed the group’s investment programme ‘until early 2009’.

The right advisers

Constrained financial conditions have had similarly negative impacts on AIM’s community of advisers, with the leading nominated advisers (nomads), brokers, accountants and solicitors reporting far less activity last year.

The most active nomad for new issues was Seymour Pierce (see Table 2) , which helped raise £117.9 million for six clients – the same number as
it chaperoned onto the market the year before. Its transactions included
a £45 million funding for Vietnam Property Fund and a £53 million placing for the aforementioned Resaca, with both getting away in the first seven months of 2008.

Cenkos and KBC Peel Hunt both completed five floats apiece, similar
to their 2007 totals, though Grant Thornton’s five was six less than it managed the year before. Collins Stewart, partly voluntarily, was another to bring fewer companies to AIM, its two floats as nomad being some way from the 15 AIM newcomers it schooled to market in 2007.

Investment fund specialist Fairfax I.S. oversaw the largest single transaction, the £116.6 million February float of Terra Catalyst Fund, while its one other client raised no funds.

The leading nomad in terms of client price performance was WH Ireland, whose single company, JSJS Designs, was introduced at 2p before quickly settling at a higher price. Collins Stewart’s two clients performed relatively strongly, with acquisitive shell Marwyn Materials up 55 per cent and Yangtze China Investment down a fairly modest eight per cent.

Among the leading brokers, KBC Peel Hunt and Seymour Pierce were jointly the most active with five new clients each.

Meanwhile, the most active accountants were Deloitte and KPMG, with nine clients each, followed by AIM specialists Baker Tilly and Grant Thornton with eight apiece.

This feature is a shortened version of the full research report, New Issues on AIM 2009. To order the report, call 020 7250 7056 or email calvin.green@vitessemedia.co.uk