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AIM big guns falter; buying opportunity or better value elsewhere?

The shares of several of AIM’s largest, highest profile, companies have tumbled over the past few months. In this Blog, Fundamental’s Chris Boxall gives his thoughts on the lacklustre performance of some of AIM’s previous high-flyers. Could now be an excellent buying opportunity or were the share prices simply far too over-heated before.

While the fall from grace of Burford Capital (LON:BUR) has stolen the AIM headlines, several of AIM’s other £billion companies have also experienced material share price falls over the past 12 months.

Fevertree Drinks (LON: FEVR), the world’s leading supplier of premium carbonated mixers, has seen its share price slump 45% from the highs reached in August 2018 when it was basking in the perfect environment of a UK heatwave, World Cup and royal wedding. However, despite the share price falls, the shares still trade at a rather punchy 36x forecast earnings estimates for the year ending December 2019 which assume 16% growth in sales.

There is no doubting the appeal of Fevertree’s excellent products and it is a simple business to understand, however, the sky-high valuation has always left little room for error and much depends on growth outside its home UK market, which is starting to appear somewhat saturated.

Group sales in the first half of 2019 only rose 12%, which is decidedly underwhelming for a business on such a rich rating. However, 31% growth from the key US market was more encouraging with the launch of Spiced Orange and Smoky Ginger Ales set to tantalise American’s taste buds. With Fevertree already dominating its home G&T market, we remain wary that the valuation as it stands still hangs on an acceleration of growth in the US and Europe. Without the help of the mania for craft gins which helped drive growth in the UK, this looks a far trickier proposition. A cracking business and huge AIM success story nonetheless, but we are not imbibing yet.

Keywords Studios (LOMN:KWS), the technical services provider to the global video games industry, has been another soaring success on AIM, although it’s acquisition led business model is very different to that of Fevertree, whose stratospheric growth was all of its own internal making. Having acquired a large number of independent studios and underpinned by a booming sector, KWS has turned itself into a significant external development partner to leading video content creators and publishers. Sales have soared over the past few years from only €37m in 2014 to €250m in 2018, with forecasts of €319m for 2020 buoyed by acquisitions and organic growth. Much like Fevertree the shares are 45% off August 2018 highs and currently trade at a more modest 26x forecast adjusted earnings for 2019. Keyword’s acquisition led model results in plenty of adjustments to its financial statements, to the extent that it is hard for us to determine what is the likely norm going forward. We prefer companies like Fevertree where organic growth is the primary driver and have yet to be tempted by Keyword’s model.

Online fashion pioneer ASOS (LON:ASC) long held the crown as AIM’s largest company. Having slipped down to 4th place at the end of September the shares have risen 46% in October following full year results which offered much needed encouragement, pushing the market capitalisation back to £3bn moving ASOS back into second place on AIM, close behind rival Boohoo Group (LON:BOO). While the shares are more than 50% off the highs reached in January 2018 the valuation continues to challenge investors like us. With international retail sales now representing just over 60% of the group total and plenty of investment made to beef up their international operations, ASOS looks well placed to supercharge international growth. However, mass market fashion retail is hard for us to understand and we aren’t tempted to jump onboard yet.

Blue Prism Group (LON:PRSM) is a pioneer in the field of Robotic Process Automation (RPA), an emerging form of business process automation technology where a virtual workforce powered by software robots are trained to automate routine back-office clerical tasks such as form-filling and invoice generation.

Having joined in AIM in March 2016 at a share price of 78p and market capitalisation of only £48m, the shares of this much hyped, loss-making business, with revenues of only £55m in 2018, reached a high of 2635p by September 2018, pushing the market capitalisation over £1.5bn.

While revenue has grown significantly since listing, losses have also escalated as the group has increased its spending on sales and marketing in support of international growth. Revenue for the 6 months ending 30 April 2019 rose 82% to £42m, but operating losses ballooned over 500% to £35m, following material growth in sales and marketing headcount. Thankfully the business had over £100m of cash in the bank available to support this international expansion, having raised £100m in January 2019 at a price of 1100p per share.

We found it somewhat disconcerting that shortly after the material fund raise the Group’s Chief Revenue Officer decided to sell 100,000 shares (the majority of his shareholding), retaining a stake of only 50,000 shares. The subsequent sale in July 2019 of 424,000 shares by the Chief Technology Officer, netting him £6.2m, didn’t offer much comfort either.

The material share sales have been fuel for the bears pushing the share price down 67% to 866p.

While Blue Prism operates in a very exciting growth area it’s also an area which is very hard for an outsider to understand, making it extremely difficult for us to make a credible valuation judgement – just because the shares have declined more than 60% doesn’t mean they are now a bargain!

Of the above AIM heavyweights, we are keeping a close eye on Fevertree. It is highly profitable (operating margins 30%) and cash generative and operates in a sector we can understand, growing organically through its own internal development, slick marketing and expanding distribution. Unlike many of its peers, its financial statements are also mercifully free of accounting adjustments, which goes down well with us.

For further information on Fundamental’s high performing AIM portfolios please email [email protected] or speak to Chris or Stephen by calling 01923 713890.


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Stunning results from this technology star highlight the potential for investment outperformance on AIM 

dotdigital Group plc (LON:DOTD) has rapidly become one of our small cap favourites and the latest results certainly didn’t disappoint.

Founded in 1999 as a web design agency, dotdigital has developed a globally compelling product suite for email and digital marketing.

Having grown significantly since admission to AIM in 2011, when it’s market capitalisation was only £19m, its marketing automation platform is now used by over 70,000 marketers in 156 countries worldwide, empowering global marketers to achieve outstanding results. Global expansion and an expanding range of products  has seen revenues grow eleven fold over the last 8 years and the market capitalisation hit an historic high of £339m in July 2019, when the share price stood at 114p.

The group’s expansion has been boosted by it partnering with many of the leading ecommerce platforms including Magento (now part of Adobe), Microsoft Dynamics 365, Salesforce and Shopify.

Results for the year ending 30 June 2019 were stunning, with revenues rising 19% to £51.3m, including organic growth of +15%, and adjusted operating profit up 25% to £11.8m.

33% growth in adjusted earnings per share to 3.88p was even more impressive and materially ahead of consensus market expectations of 3.4p.

The group acquired Comapi in November 2017 which specialises in ‘live chat’ and has built a software platform that allows clients to communicate directly with their customers via email, SMS and social messaging apps. The Comapi technology has now been fully integrated with dotdigital’s platform, with 19% of the group’s customers using more than one channel, helping to grow average revenue per user 14% to £966 per month.

The all-important recurring revenue as a percentage of total revenue increased to 86% thereby offering excellent visibility into the future.

The key partnerships have also been strengthened with revenue through Magento up 27% to £11.8m.

Despite the ongoing impact of GDPR, revenue from the EMEA region delivered double digit growth, but more distant overseas markets were the star performers. Having initially struggled to progress in the US, the group now appears to have found its feet with revenue in this key geography rising 27% to $9.0m. The APAC region was even better, reporting revenue growth of 83% to AUS$3.8m.

dotdigital comments how innovation is at the core of everything and they are committed to the continuous evolution of the technology, reflected in the considerable investment in the period. Despite this, excellent operating cash inflow of £12.3m still resulted in free cash flow of £6.3m, boosting year end cash to £19.3m.

The outlook was extremely encouraging with the first quarter of the current 2019/20 financial year starting well.

The house broker commented how “there are few companies we can point to which consistently deliver 15% organic growth, PBT margins over 25%, and reliable cash conversion” reiterating their target price of 135p, 37% above the current share price.

Having held the shares for several years and remaining enthusiastic buyers, we would echo their comments.

To discover other exciting investment opportunities on AIM please contact Chris or Stephen at small cap investment specialists Fundamental Asset Management by calling 01923 713890 or emailing [email protected] 

 

 

 


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AIM stocks to watch after the recent rout

Three AIM stocks to watch

In this latest interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses the performance of AIM over the last few months and introduces three companies which could present interesting buying opportunities.

While the travails of Burford Capital have dominated the AIM headlines, there has been plenty of other activity on London’s growth market and the companies discussed in the interview are worth a closer look.

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning for more than 15 years.

For further information on Fundamental’s high performing AIM portfolio service, please contact Chris or Stephen on 01923 713893.

 


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Crowdfunding continues to thrive, but the valuations look crazy – better value on AIM?

The latest news that leading UK based crowdfunding platform Seedrs raised a further £4.5m in a new funding round has highlighted the appeal of rapidly growing, early stage companies to UK investors, at least relative to the duller offerings on the UK stock market.

However, while there is no doubting the growth appeal of early stage businesses, we struggle to understand the high valuations many of these are achieving on the crowdfunding platforms when raising new money. In many cases money is being raised based on a mere idea, rather than a viable business. We fear this investing bubble will ultimately see small private investors lose out significantly, not simply through business failures, but as these cash consuming start-ups are subsequently forced to raise money at far more modest valuations.

A prime example of the valuation folly on crowd funding sites was recently illustrated by WeSwap, the online peer-to-peer travel money platform.

Back in November 2018 WeSwap was meeting prospective investors with a view to listing on AIM but failed to attract interest at the desired valuation. Admittedly it wasn’t a great time to list with stock markets going through one of their periodic sell-offs, nevertheless, the proposed valuation of more than £40m for a loss making business in a highly competitive arena looked crazy to us.

In 2018, WeSwap generated modest revenues of just over £1.5m with losses over £2.5m. As of June 2019, it had over 500,000 users who had exchanged more than £255m.

Fast forward 7 months and WeSwap raised a further £2.5m on Seedrs at a pre-money valuation of an eye-popping £41.6m.

Comparison can be made to AIM listed Ramsdens (LON:RFX), the diversified, financial services provider and retailer, which has its own thriving foreign currency exchange business.

For its last financial year ending March 2019 Ramsdens grew revenue 17% to £46.8m and underlying profit before tax was up 4% to £6.7m. Its foreign currency business alone served 705,000 customers, exchanging £496m of currency and generating gross ‘profit’ of £11.6m. It also rewarded shareholders with an appetising dividend of 7.2p per share, equating to a yield of 3.7% at the current share price.

We acknowledge that Ramsdens may not be growing as rapidly as WeSwap, however, unlike WeSwap it is demonstrating an ability to grow while generating profits and cash.

Many investors seem fixated that online offerings like WeSwap represent the only route to investment success. Yet the success of many online businesses is dependent on spending huge sums on marketing, much of it swelling the coffers of Google and Facebook. Contrastingly, while a High Street based business like Ramsdens addresses a much smaller potential customer base from its individual sites, its multi-faceted offering, of which foreign currency is just one element, is a beneficiary of falling rental costs.

Backers of crowd funded businesses will ultimately require an exit and a stock market listing, notably AIM, is one such route for this. Yet UK stock market investors seem very reluctant to overpay for loss-making, early stage businesses, addressing relatively small markets. It’s very different in the US, where the market is so much larger and the potential rewards thereby much greater.

While valuation concerns persist with many AIM companies, they look relative bargains compared to their peers on crowdfunding sites. Furthermore, as Sterling is set to languish over Brexit we expect to see overseas buyers keeping a close eye on modestly valued UK listed companies.

August saw our AIM portfolio holding Sanderson Group (LON:SND) snapped-up by a US based acquirer and we expect to see more over opportunistic moves of this type over the coming months.

If you are interested in benefiting from our expertise investing in AIM and smaller quoted companies, please speak Chris or Stephen on 01923 713890 or email [email protected]


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Burford Capital, AIM’s largest company, underlines its support for AIM

The interim results statement from Burford Capital (LON: BUR), currently AIM’s largest company, provided an interesting commentary on its reasons for remaining on AIM, rather than consider a move to London’s Main Market. With a market capitalisation approaching £4 billion, Burford would be close to gaining entry to the FTSE100 Index should it be on the Main Market, which would see index tracker funds be obliged to acquire shares, thereby offering a boost to the share price.

So why doesn’t Burford Capital move to the Main Market?

Burford Capital’s interim results statement comments that it hardly ever encounters potential investors who baulk at buying larger AIM stocks like Burford and companies with market capitalisation above £500 million make up around half of AIM’s total value.
Burford has broadened its shareholder registry over time to include some of the world’s largest and most sophisticated investors who are unperturbed by their choice of market.

Burford sees no evidence that it would see increases in liquidity or other trading benefits from a move to the Main Market and they already have liquidity comparable to or better than Main Market companies with similar market capitalisations to theirs.

As they concluded, the reality is that both AIM and the Main Market see corporate and governance failures at companies of all sizes – for every Patisserie Holdings on AIM there is a Carillion on the Main Market, although in the case of the latter at least investors were forewarned! Listing rules and governance codes are not the primary defences against such failures; rather, sound management, an experienced, attentive and involved Board and high-quality external advisers (and especially auditors – Grant Thornton take note) are key.

Therefore, despite its size and evident appeal to large institutional investors, Burford is unlikely to pursue a Main Market listing in the near term as they do not see the benefits exceeding the costs and disadvantages.

Fundamental does not hold shares in Burford Capital. In addition to concerns surrounding its qualification for Inheritance Tax planning purposes (Investor’s Champion AIMsearch gives a detailed explanation of this) , we remain wary of its business model where reported profits are far removed from the operating cash flow. We are also uncomfortable with the opaque nature of its accounting, where the details of litigation investments remain hidden.

For the 6 months ending 30 June 2019 pre-tax profit of $226m resulted in an operating cash inflow of only £6.7m. Add loan interest of $19m and that derisory inflow turned into an operating cash outflow of $12m. It has always been this way at Burford, which brings in substantial unrealised gains as income, something it regularly addresses in its results statement.

Other than snippets of information relating to very substantial cases such as the giant Petersen claim, in respect of which Burford has banked huge sums, we are left in the dark on the identity of its ongoing investments.

We are not alone in being concerned that, by including unrealised gains in income, there is a risk that Burford is recognising income associated with ongoing investments that may one day become losses. Furthermore, the immediate re-investment of cash generated into new claims means very little internally generated cash is ever reinvested into anything shareholders have a clue about.

We acknowledge that both IFRS and US GAAP require a wide swathe of businesses to fair value Level 3 assets (the most illiquid and hardest to value) and flow unrealised gains through their income statements, including not just Burford but firms like Blackstone and KKR.

We also appreciate that Burford is not unique in holding a significant number of Level 3 assets, however, it’s the contentious nature of these so-called ‘assets’ which are very different to the equity holdings of private equity groups. Furthermore, Burford’s contentious assets are now supported by a growing debt pile, a highly unusual scenario.

Nevertheless, up to now Burford has been a roaring success on AIM, where it seems set to remain for the foreseeable future.


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Eight small cap stocks to watch

Eight small cap stocks to watch

In this latest video with IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, sits down with Graham Neary from Stockopedia and Cube Investments and IG’s Jeremy Naylor, to discuss eight small caps stocks which could be worthwhile following.

Companies covered include:

Adept Technology Group (LON:ADT) – provider of managed IT services and unified communications
Duke Royalty (LON:DUKE) – provider of alternative financing solutions to corporates
H&T Group (LON:HAT) – pawnbroking, financial services and jewellery retail
PCF Group (PCF) – established lender
Park Group (LON:PARK) – multi-retailer redemption product provider
Pressure Technologies (LON:PRES) – specialist engineer
Quartix Holdings (LON:QTX) – subscription-based vehicle tracking systems, software and services
Rosenblatt Group (LON:RBGP) – legal services with a specialism in dispute resolution

You can find out more about Fundamental AIM portfolios, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning services for more thasn 15 years.

 


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Jeremy Corbyn’s ‘Land for the Many’ and Inheritance Tax relief on AIM shares

An independent report commissioned by the Labour party entitled ‘Land for the Many’ proposes, among other interesting suggestions, to replace the current system of Inheritance Tax with a “lifetime gifts tax” levied on the recipient of the gifts. The proposals give rise to obvious fears that children will be taxed for financial assistance given to them during their lifetimes, including assistance to buy a home, as well as facing higher levies on inheritances.

Under the proposed system, a Corbyn led government would levy a tax on the gifts received above a lifetime allowance of £125,000. When this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income derived from labour under the income tax schedule.

The Resolution Foundation estimate that taxing gifts through the income tax system would raise £15 billion in 2020/21, £9.2 billion more than the current inheritance tax system, and would do so more progressively.

Under the proposal outlined by the Institute of Public Policy Research (‘IPPR’) there would be conditional exemptions for business and agricultural property, under which tax could be deferred until the asset is sold or until the business ceases to be a trading entity and becomes an investment entity. This would allow families to maintain the integrity of agricultural land or business assets.

There are clear grounds for the proposed tax system to continue supporting Business Relief, which underpins the long-term investment in small trading businesses, the lifeblood of the UK economy.

Many shares listed on AIM, the London Stock Exchange’s market for smaller growing companies, qualify for Business Relief purposes. UK individuals have reaped the rewards of patient long term investment in smaller innovative companies on AIM, many of which have grown into sizeable businesses. Fundamental Asset Management’s  Blog has highlighted AIM success stories and also draw attention to the occasional failure.

While the short 2-year qualifying period encourages investment in AIM as a tax planning tool, we would urge investors to consider the longer-term investment benefits.

Our patient, long-term approach has seen our AIM for inheritance-tax planning portfolios materially outperform leading stock market indices over the 15 years we have been investing in AIM.

Performance of Fundamental AIM portfolios (blue line) vs leading stock market indices

 

AIM remains a market for smaller investors, not large institutions, and a place where the individual can enjoy material investment outperformance and continue to support the UK economy.

Fundamental AIM portfolios can be accessed directly or via many leading wrap platforms, including Standard Life, Transact and Elevate.


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Unpicking Woodford’s woes and the undressing of Majestic Wine

In this podcast with Investors Champion, Chris Boxall, co-founder of Fundamental Asset Management, discusses how the problems at the Woodford Equity Income Fund have come about and how regulators, market commentators, financial supermarkets and individual investors can ensure it doesn’t happen again.

As a small cap specialist, Chris and the team at Fundamental, know all too well the difficulty of investing in smaller companies and managing client expectations at certain times.

Chris also considers the change of strategy at Majestic Wine (LON:WINE), one of AIM’s oldest constituents, which is trying to sell its Majestic Wine business to focus on the newer, faster growing, Naked Wines. It certainly looks a bold move for a company that used to be a prime pick for many Inheritance Tax planning portfolios but which has fallen out of favour in recent years.

For more information on Fundamental’s high performing AIM portfolios you can download fact sheets and quarterly reports from the link here.


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Enhanced investment growth, substantial tax savings and supporting UK business growth

According to the Office for Budget Responsibility’s ‘Economic and Fiscal Outlook’ report released in March 2019, the Government is forecast to collect £6.3billion from inheritance tax by the 2023-24 tax year.

This is a £1billion increase from the last tax year ending 5 April 2019, when HMRC collected £5.3billion from inheritance tax.

To put things in plainer language, analysis by insurer NFU Mutual determined that the average inheritance tax bill reached almost £200,000 in the last tax year, up £60,000 in five years. HMRC statistics also revealed that around 5,000 individuals paid Inheritance Tax last year while they were still alive, due “in many cases” to gifts into certain types of trust, which can trigger an Inheritance Tax bill.

– Scandalous to pay tax on assets which have already been taxed!

These are big amounts being paid by estates on money that has already been subjected to prior taxes. Trusts also complicate things further, adding another layer of fees, largely for the benefit of lawyers.

– Super rich pay less Inheritance Tax

According to research undertaken by Canada Life, the UK’s super-rich are paying just half the effective Inheritance Tax rate of many smaller estates.

The data from HMRC Inheritance Tax forms for the 2015/16 tax year showed that estates worth £10m or more paid 10 per cent Inheritance Tax on average, compared to 20 per cent paid by estates worth between £2m and £3m.

According to analysis by Canada Life, this gap in tax was due to the different asset composition for estates of different sizes. Larger estates typically had a smaller percentage of their value in UK residential property (10 per cent), which doesn’t have high levels of tax efficient exemptions, and a much higher amount in securities (40 per cent), such as shares in AIM companies qualifying for Business Relief, which can attract 100 per cent tax relief.

Smaller estates should be benefiting more from the available reliefs to reduce Inheritancxe Tax.

– Enhanced investment returns

Business Relief has proved a simple way of avoiding Inheritance Tax while at the same time greatly enhancing investment returns and supporting UK business growth. However, despite its simplicity and growing popularity, it remains little used.

According to accountants UHY Hacker Young, HMRC forecasts showed how UK taxpayers were expected to reduce their Inheritance Tax bills by 12%, or a record £710m in 2017/18, through investments made in unlisted companies and other business assets. With an overall inheritance Tax take of £5.3billion and rising, there is therefore clearly scope to use Business Relief to further lessen tax bills.

– Invest in growth

The main UK stock market has woefully underperformed the US stock market over recent years, with the former dominated by many low growth companies of a bygone era, saddled with huge amounts of debt and large pension legacies.

Smaller, more nimble companies, on London’s growth market AIM have delivered material outperformance over a number of years and many of these growth stocks come with the added attraction of Business Relief.

Mark Giddens, Partner at UHY Hacker Young, commented: “Encouraging investment in AIM shares and other unlisted companies is good for the broader economy as they create growth and jobs.”

– 15 year track record of investment growth and tax saving

Fundamental Asset Management has been successfully investing in AIM for over 15 years and while many of our clients are initially drawn by the potential Inheritance Tax benefits, the investment attractions soon become apparent – our recent Blog on AIM portfolio holding AB Dynamics illustrates the potential returns.

Since inception in September 2004, Fundamental Asset Management’s AIM for Inheritance Tax planning portfolios rose 320% on average to the end of 2018. By comparison, over the same period, the leading index of UK listed companies had only risen 120%. Even the better performing US S&P 500 index only managed 201% growth over that period.

Performance of Fundamental AIM portfolios vs leading stock market indices

The 15 years may have featured periods of weakness from AIM (and some occasional company failures) yet the patient, diversified portfolio approach has been highly rewarding over the long term.

Furthermore, unlike investments in unlisted companies, AIM shares can also be sold, with cash returned to investors at short notice if required.

There are some fantastic growth companies on AIM, many of which are covered by our associates at Investor’s Champion. We would urge investors to look at AIM for its investment attractions and not simply the tax benefits, although letting the tax tail wag the investment dog, has ironically proved highly beneficial for our clients!


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Fundamental IG High Yield AIM Portfolio – April 2019 update

It’s been a positive start to 2019 for the High Yield AIM portfolio created for IG Markets, which currently offers a forecast average dividend yield of just over 6%.

In this latest video update, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses the performance with IG’s Jeremy Naylor, including a new high yielding position for the portfolio.

Companies discussed include: K3 Capital Group (K3C), Manx Telecom (MANX), Property Franchise Group (TPFG), Redde (REDD), NAHL (NAH) and Warpaint (W7L).

In addition to a compelling dividend yield, the portfolio has the attraction of potential 100% relief from Inheritance Tax.

You can find out more about Fundamental AIM portfolios, including the latest fact sheets, from the link here.