AIM company valuations the most attractive we have seen

It’s been a torrid time for the AIM market for around 2 years now, with the  AIM index down just under 40% in that time. Yet things are far better than you might expect and what the declining share prices imply, if you know which companies to look at.

We have assessed 39 AIM stocks, representing ‘Core’ or ‘Satellite’ holdings within our AIM IHT Growth Portfolio (as opposed to our AIM IHT Income Portfolio). The average weighted market capitalisation of all stocks is £683m, which means we are primarily weighted to larger, more resilient AIM companies. What are the reasons to be positive?

In our webinar this week ‘AIM A HALF YEAR UPDATE’ we covered this and other topics. You can view the webinar here and download the slides for AIM a half year update.

1) VALUATION APPEAL
We aren’t fans of the much used PE ratio in assessment of valuation given the number of adjusting items in arriving at ‘E’ and prefer to focus on Free Cash Flow (‘FCF’) in our assessment of profitability and valuation.

The average FCF yield of 4.47% of our 39 stocks is the highest we have ever seen for our AIM portfolio, highlighting their valuation attractions. This figure also adjusts for anomalies in a single year, in which case an average FCF over 3 years has been used.

2) DIVIDEND YIELD
Average forecast dividend yield is 2.65%.
Only 3 of our companies don‘t declare a dividend at all as they reinvesting available cash to support growth at higher rates of return.
Within our AIM IHT Growth book, this is the highest dividend yield ever. The average FCF/dividend cover is 1.71 times, suggesting dividends are well covered by cash flow.

3) STRONG CASH POSITIONS
10 companies are in a position of net debt and we are not currently buyers of 3 of these stocks, whereas 29 companies hold net cash.

Others in a net debt position are well within covenants and have reliable and supportive cash flow and are able to pay down debt rapidly. This puts them in a very strong position.

4) GEOGRAPHICAL EXPOSURE
20 companies have the majority of their revenue coming from the U.K. (11 of these only operate in the U.K.). 2 of these are considered beneficiaries of a more challenging consumer environment.

3 of these are underpinned by UK government contracts (healthcare, infrastructure, energy).

2 Companies are estimated to have an even split in revenue between the U.K. and Overseas.

17 companies (43%) get the majority of their revenue from overseas markets, with some wholly overseas businesses.

5) HEIGHTENED VOLATILITY PRESENTS OPPORTUNITY
Good stocks are being thrown out with the bad.

There is a wonderful opportunity to acquire good ‘growth’ companies on far more modest valuations, which is one of the reasons why several AIM companies have been acquired by private equity firms who are also sniffing around numerous others.

Sentiment around AIM can quickly change.
Back in 2020, a 35% decline turned into a 20% gain. This sort of change can happen very fast.

THOUGHTS FOR THE REST OF 2023
The AIM market has fewer “bad” companies than back in 2007/8 financial crisis. When you look into many of the larger companies and how they are performing (turnover, profitability, order books, cash flow etc), they continue to trade well, although you wouldn’t believe it from the languishing share prices! Once small investors start gaining confidence again, these companies will be well placed for share price increases.

FURTHER INFORMATION
If you or your clients would like to speak to one of our portfolio managers, please contact Business Development Manager, Jonathan Bramall at [email protected] or on 01923 713 894