What is driving AIM’s outperformance?

The AIM index is up 30% since 1st April i.e. Q2 2020. Maybe this is not surprising when you consider that it fell by 29% in Q1 and, as has been widely reported in the mainstream press, markets have rebounded.

However, when you compare to the UK main markets, AIM has massively outperformed in Q2 with the FTSE 100 and FTSE All-Share up c10% and 11% respectively. And, it’s not if the main markets didn’t fall as much in the first quarter. The 100 was down 25% and the All-Share 26%.

So what is driving AIM?

Well, it is probably a number of factors.

Firstly, it has been well documented for some time that the FTSE 100 is full of pretty dull and uninspiring companies and that can partly explain why it has also underperformed the S&P500. The UK blue-chips did benefit last year from a weakening pound as overseas investors bought cheaper assets and yield. With Sterling still relatively weak, it appears that no longer remains an attraction.

However, that aside it is more likely that the dominance of a few underlying companies is distorting the index and this has always been the problem of using AIM as a comparative index.

There were 831 companies listed on AIM at the end of May 2020, with the combined market capitalisation of the market c£95.3bn. There were 17 companies individually valued at more than £1bn, which between them represented 34% of the total market capitalisation.

With AIM being a weighted index, i.e. the return of the index is based on a weighted return by market capitalisation, rather than each company being weighted equally as the US Dow Jones is for example, it is fair to say that those 18 companies will really move the needle.

And if we look into some of those companies, you will see the influence they have.

Probably two of the most well known companies listed on AIM are online clothing retailers Boohoo and ASOS. Boohoo, with a market cap of c£5bn is comfortably the largest company on AIM by value, being £1.5bn more than the next on the list, Abcam.

Combined, these companies represent over 8% of the index. When you consider that ASOS is up 177% in this quarter alone and Boohoo 115%, returning to pre -lockdown levels, you can see the influence they are having on the index as a whole. ITM Power, another £1bn+ company is also up over 100% quarter to date.

Unless you are holding these companies in your portfolio, it is very likely that your AIM portfolio is going to be significantly underperforming the AIM index.

So although the AIM index has been a better indicator for AIM portfolios in recent years, it goes to show that it can be misleading in extraordinary times.

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.


RWS Holdings (AIM:RWS) – whopping acquisition significantly earnings enhancing

The world’s leading provider of patent translations, international patent filing solutions and searches has announced a significant acquisition that is expected to be immediately and significantly earnings enhancing.

 The AIM quoted Group has acquired Corporate Translations Inc (“CTi”) for a cash consideration of US$70 million. Based in Connecticut, USA, with 140 employees, CTi is the world’s leading life sciences translation and linguistic validation provider. The Company was founded in 1990 specifically to cater for the growing demand for high quality translation services in the life sciences sector and is now a recognised leader in successfully managing complex translation projects on behalf of the world’s top pharmaceutical and biotech companies and their Clinical Research Organisation (CRO) partners. It enjoys a preferred supplier relationship with many of its key customers, with extraordinary penetration of the blue chip life science community.

As CTi’s customers operate in highly regulated and audited industries, they place a premium on high quality translations being delivered to specific deadlines, which in turn underpins CTi’s attractive margins. RWS already focuses on the life sciences sector both through its patent translation and filing solutions and with its separate Medical Translation Division which includes the linguistic validation specialist PharmaQuest, a company acquired in 2013. The greater scale of CTi, combined with the existing specialist RWS divisions will immediately transform the Group to a world leading position in life sciences translations and linguistic validation and further enhance its competitive standing amongst the largest specialist translation companies in the world, especially in IP support services.

The acquisition of CTi is expected to be immediately and significantly earnings enhancing, with the US$70m consideration to be paid based on CTi reporting an EBITDA of not less than US$7m for the year ended 31 December 2015. CTI’s latest audited financial statements, for the year ended 31 December 2014, showed revenues of $23m and adjusted EBITDA of $4.8m.

The acquisition will be funded by $25m from internal cash resources (RWS had net cash of £30m at 30th Sept 2015) and US$45m through a five year loan provided by Barclays. The co-founders of CTi, will retain their current positions for up to a year, to allow the enlarged Group to benefit from their significant knowledge and experience as they integrate the business into the enlarged Group.

They are certainly paying what looks like a hefty price for CTI but many have been concerned how the Group’s growing cash pile could be best utilised and this acquisition appears to deliver on many fronts.

Forecasts for the year ending September 2016 were previously for pre-tax profit of £22.1m and eps of 8.0p. One senses a minimum 10% earnings upgrade is probably anticipated following the acquisition moving the earnings number closer to 9p.

UPDATE – Broker forecasts

The house broker has actually raised their EPS forecasts by 20%.
Financial Year moves to 9.6p from 8.0p, with 2017 raised to 10.1p from 8.4p.

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