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
AIM isn’t a market that’s generally considered for its dividend and income attractions, and we have always expressed caution on AIM companies paying out high dividends, when they should be putting their cash to better use. However, the steep decline in share prices of many good-quality AIM companies has seen dividend yields soar to levels not seen since we started managing AIM IHT planning portfolios back in 2004 and the AIM of today is thankfully a far better market than it was back then.
With many AIM companies sitting on plenty of supportive cash, but their share prices languishing, these high yielders also have growth attractions.
We therefore thought it was an appropriate time to reassess the dividend and income potential of AIM companies for IHT planning purposes.
Join us for our webinar AIM IHT portfolios for INCOME? Is it worth it? on 25th November at 3pm. We will discuss the benefits and potential pitfalls of investing in Inheritance Tax qualifying AIM companies for income generation and the potential yield available.
The webinar will cover a number of topics including:
Sign up to the webinar from the link here
The Fundamental AIM IHT Portfolio is a discretionary investment management service where clients can obtain 100% mitigation from Inheritance Tax, benefit from the capital growth afforded by the AIM market and retain control of their assets.
You can find out more about Fundamental Asset Management’s high performing AIM IHT ISA and AIM Inheritance Tax portfolio service, which has been delivering exceptional investment returns for more than 18 years, from the link here.
To find out more about the benefits of investing in AIM, or if you wish to discuss the current situation, please speak to our Business Development Manager, Jonathan Bramall, via email [email protected] or phone 01923 713 894.
It has been a painful time for AIM investors across the board. Fundamental Asset Management portfolio managers have been giving their thoughts and insights into where the market is, how we got here and where it might be going. In addition, in a recent interview with Jeremy Naylor on IGTV, co-Managing Director Chris Boxall talks about specific stocks, the potential bargains and things to watch out for.
FUNDAMENTAL ASSET MANAGEMENT WEBINAR OCTOBER 2022
To view the new webinar please click on the following link – AIM: cheap for good reason or bargains to be snapped up? In the webinar, AIM in Q3 as well as Year To Date is reviewed, why we are where we are and what lies ahead.
IGTV INTERVIEW
For the interview with Jeremy Naylor click on Bargain hunting on AIM. In the interview, Jeremy Naylor of IGTV and Chris Boxall of Fundamental Asset Management, discusses potential bargains on AIM following recent falls.
AIM IHT PORTFOLIO
The Fundamental AIM IHT Portfolio is a discretionary investment management service where clients can obtain 100% mitigation from Inheritance Tax, benefit from the capital growth afforded by the AIM market and retain control of their assets.
You can find out more about Fundamental Asset Management’s high performing AIM IHT ISA and AIM Inheritance Tax portfolio service, which has been delivering exceptional investment returns for more than 18 years, from the link here.
To find out more about the benefits of investing in AIM, or if you wish to discuss the current situation, please speak to our Business Development Manager Jonathan Bramall via email [email protected] or phone 01923 713 894.
Global Markets Continue to Struggle
The outlook for global economies continues to look challenging, with high inflation and rising interest rates potentially tipping many countries into recession.
As a result, global stock markets, led as usual by the US, have been suffering for quite a while. Unfortunately AIM has not been immune to this, with the AIM index now down over 33% year to date.
The bear market since the summer of 2021 is one of the longest we have seen in our 30+ years in investment management. Even the financial crisis of 2008 did not last as long as this and we can only hope that we are somewhere near turning the corner.
Certainly, the recent updates from our core portfolio holdings have been largely positive, despite the challenges they face, although this has not been reflected in their share prices!
What do we do we do at the moment?
As we have previously mentioned, with the market not reflecting the general positive performance of many of the companies in our portfolios, the simple answer is, we do very little, other than drill down into the many results and updates being reported by companies and keep a very close eye out for bargains.
During previous periods of excessive volatility we recommend clients ignore the manic movements of share prices and unless there is a need to sell, the best cause of action is to continue wait for things to turn around, knowing we are well invested when the turnaround occurs.
It is worth remembering that in February 2020, the AIM market fell 36% in a month but it finished the year up 20%. A similar recovery took place after the Financial Crisis of 2007/8. We expect something similar in the near future, with the AIM of today a far higher quality market than it was in 2008.
During periods like this, we consider long-term holders of small cap shares should view the stock market as effectively closed, unless they are looking to buy a potential bargain.
Potential light at the end of the long tunnel?
Despite all of the negative news, today the Office for National Statistics announced that rather than contract as their previous reading suggested, the UK economy grew in the second quarter of this year by 0.2%. Whether this is the start of things beginning to improve remains to be seen.
Upcoming webinar
The next Fundamental webinar on Wednesday 12th October at 3 pm is called AIM: cheap for good reason or bargains to be snapped up? It will be on looking back at the last quarter and reviewing the outlook ahead; including a focus on how have companies really been performing vs their stock price? To register for the webinar and to be able to view it after the event, click here.
To find out more about the benefits of investing in AIM, or if you wish to discuss the current situation, please speak to our Business Development Manager Jonathan Bramall via email [email protected] or phone 01923 713 894.
