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Sunak scraps the Budget – should AIM tax reliefs be enhanced?

The popular press had previously alluded to the potential withdrawal of Inheritance Tax/Business Relief on AIM shares. With Chancellor Sunak scrapping his autumn Budget, as he focuses on matters of more immediate concern to the economic welfare of the country, any adverse tax changes for holders of AIM shares therefore appear to be off the table for the time being.

As we have suggested before, the Chancellor may be more inclined to extend tax reliefs for those supporting smaller companies in an effort to unlock the considerable savings held by the wealthier members of the population, which are effectively being eroded due to inflation and the derisory interest available on savings accounts.

The poor returns generated by the main UK stock market over the last decade and the significant outperformance of AIM portfolios over this period also suggests that investors would have been far better off investing in smaller, faster growing companies on AIM, than many of the aged dinosaurs of the main market.

Numerous small AIM pharmaceutical and biotech groups have been at the forefront of developing tests and vaccines in the battle against Covid-19. This has not been possible without the support of their shareholders, many of whom have been encouraged to invest with the added attraction of various tax reliefs.

Specialist research house, Equity Development, previously highlighted the huge benefits AIM brings to the UK economy and how the mild encouragement provided by the Inheritance Tax concession to those considering an IPO onto AIM is a very large multiple of the cost in tax foregone by HMRC.

Equity Development considers AIM companies contributed over £33bn Gross Value Added (GVA) directly – over 40% more per employee than the national average – and just as much indirectly to the UK economy since their direct GVA has increased by 35% in the last five years, more than twice as fast as the average. Not only are AIM companies more productive than average, their productivity is growing – at 11% pa, significantly faster than average.

A report by Grant Thornton on AIM’s first 25 years shows that small companies listed on AIM perform ‘better’ – generating more added value, more employment and far greater tax receipts for HMRC – than comparable “private” companies.

AIM’s superior growth has, in just the last five years, added £4.7bn pa to UK economy and more than £1bn per annum to HMRC. Rishi, take note!

Many investors and advisers are fearful of the perceived extra risk of investing in AIM. Our forthcoming webinar ‘The Truth about Risk on AIM’ will cover this and other misconceptions about AIM.  You can register for the event by visiting the link here.

Not only is AIM of huge benefit to the UK economy but AIM listed companies represent the primary source of growth for UK small cap investors, reflected in the significant outperformance of AIM for IHT managers, including Fundamental, over the past decade or more.

Since launch on 19 June 1995, AIM has supported nearly four-thousand growth companies in raising over £117bn, 61% of which has been through follow-on fundraisings. The equity fund raisings over the pandemic have seen investors plough £billions into UK companies, removing a further burden from the government.  For the eight months to the end of August AIM companies have raised £3.6 billion of follow-on capital.

We reiterate our suggestions that, for a limited period, the UK government should actually consider enhancing the tax incentives for investing in the newly issued shares of UK listed companies, whatever their size, whether on the main market or AIM. Now that’s a radical thought!

Chris Boxall

Cofounder & Co-Director

Please join the Fundamental team at our webinar ‘The Truth about Risk in AIM’.

Click the picture below to register..

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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Watershed event for AIM

The proposed acquisition of main market listed SDL (LON:SDL) by AIM quoted RWS Holdings (LON:RWS) is, in our opinion, a watershed moment for AIM, as an AIM company acquires a sizeable main market listed peer, but the combined group reamins on AIM.

RWS is one of the world’s leading language, intellectual property support services and localization providers. While those don’t sound like the most thrilling of activities RWS has delivered stunning results for shareholders over the years.

Chris Boxall discusses the deal in this video here.

Fundamental have been investors in RWS, whose headquarters is close to our own office, for about 14 years. Here is a brief history of its progress on AIM.

RWS arrived on AIM in October 2003 via a reverse into the previously named shell company Health Media Group.

The equivalent share price at the time was 22p and market capitalisation £45m. Fast forward nearly 17 years and the shares have risen nearly 2700% to 613p (they were as high as 767p this month), with the market capitalisation £1.8bn.

Through a mixture of organic, and more recently more acquisition led growth, RWS has developed into one of AIM’s largest companies.
RWS’s acquisition strategy really accelerated in 2013 with the acquisition of inovia Holdings, a leading provider of web-based international patent filing solutions.

It followed this in November 2015 with the sizeable acquisition of Corporate Translations for US$70m. CT was the world’s leading life sciences translation and linguistic validation providers.

February 2017 saw the acquisition of LUZ, a market leading Life Sciences language services provider based in San Francisco, for a cash consideration of US$82.5m. To support this meaningful acquisition, it raised gross proceeds of £40.0m at 330p per share.

In Nov 2017 it acquired Moravia, a leading provider of technology-enabled localisation services, for $320m. Localisation is the adaptation of content, software, websites, applications, marketing materials and audio/video for hundreds of languages and geographies. It requires the translation and customisation of clients’ content and platforms for cultural conventions, compliance with local regulations and consistency of brand style and tone.

For the half year ending 31 March 2020, Moravia represented 47% of RWS’ group revenue of £170m and 34% of the group’s operating profit.
Smaller acquisitions followed in 2019 and June 2020, culminating in this week’s deal to acquir main market peer SDL Group in a £700m all-share deal.

The combination of SDL and RWS will create the world’s leading language services and technology group with capabilities across a range of language services and IP services, combining the complementary strengths of RWS’ specialist technical translation and localisation capabilities with SDL’s software, machine translation and AI capabilities.

It will support an expanded blue chip customer base with limited overlap across its core markets, including 90 of the world’s top 100 brands by value, all the top 10 pharmaceutical companies globally, many of the major West Coast technology businesses, and approximately half of the top 20 patent filers worldwide.

The RWS name will be retained for the combined group which will continue to be headquartered in Chalfont St Peter and remain listed on AIM, which is good news for those holding shares in RWS for the Inheritance Tax planning attractions, including many of our clients.

The combination should put SDL’s technology to better use thereby enhancing margins, which in the case of SDL, have been somewhat ordinary – while the two businesses had similar revenues in 2019, RWS’s operating margins were more than double those of SDL. Pro forma FY2019 revenues are £732m and pro forma adjusted operating profit £116m, imply a combined operating margin of 15.8%.

What has been constant in RWS’ journey has been the presence of Chairman Andrew Brode, who retains a near 33% stake in the current business and to our knowledge has never sold a share. We are reassured that, with so much of his personal wealth at stake, Mr Brode would have thought long and hard about this deal. The Inheritance Tax planning attractions are no doubt an incentive for him to keep the group on AIM!

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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Good few weeks for our portfolio companies

Despite their obvious appeal and relevance in our lives, many UK investors surprisingly have little direct exposure in their portfolios to leading US technology groups, preferring instead to invest via a collective investment scheme.

We find it surprising that while much of the UK population is happy to use Amazon, Google, Apple iPhones etc, it isn’t interested in owning some of these fantastic companies. That’s why our general bespoke portfolios, as well as our new Ultimate Stocks portfolio, holds shares in the companies discussed below.

The significant outperformance of the US stock market over the UK over virtually any time period you care to mention, suggests that as reluctant investors in the US market, UK investors are at a distinct disadvantage and destined to underperform. The main UK market is also lagging AIM over recent periods, which isn’t surprising given AIM’s abundance of growth opportunities compared to the many dinosaurs roaming on the UK main market.

Our long term general portfolio holding Microsoft opened results season with its quarterly results last week, reporting 13% growth in sales to $38 billion and profits of $11.2 billion, both ahead of expectations. Having closed the June quarter with $136 billion of cash it certainly has plenty of resources at its disposal, with video app TikTok rumoured to be a potential acquisition target.

Despite the closure of its stores around the world, portfolio holding Apple’s revenues for 4th quarter rose 11% to $59.7bn, a new record and significantly exceeding forecasts of a 3% decline. With a growing portfolio of excellent products and an attractive services business, Apple continues to look in great shape buoyed by a huge cash pile.

Google’s holding company Alphabet was the only one of the big tech titans to report declining numbers, although even these were better than revised expectations as many feared a more significant Covid related decline in advertising revenue.

The Ultimate Stocks portfolio, launched in conjunction with our associates Investors Champion, offers a simple and transparent route for UK investors to gain exposure to these and many other exciting companies.

Moving away from the US, it is great to be able to report positive news from plenty of our AIM holdings, many of whose services and products we also use and come across in our daily lives.

Jarvis Securities, the provider of stockbroking and financial administration services, recently issued fantastic interim results supporting a material increase in its dividend. Jarvis’ “Model B” outsourced arrangement is a great solution for small investment management firms and Fundamental is a client.

Gamma Communications, a provider of communications services to business markets in the UK and Europe, issued a very positive trading update with management now anticipating that full year will be ahead of estimates. With 93% of revenue recurring GAMA is in great shape and well-placed to continue to thrive. Fundamental uses Gamma’s horizon telephone system.

dotdigital, the leading ‘SaaS’ provider of marketing automation confirmed that the pandemic had a minimal impact. Having proved itself in the toughest of markets and with continuing momentum online supported by some fantastic partnerships, dotDigital appears to have an exciting future ahead. While we aren’t currently a client, we have always been impressed with its dotmailer email offering.

Satellite holding Property Franchise Group confirmed a strong performance across the half year as well as a return to growth in the final month of the period which has continued into July. EweMove, its hybrid online/physical sales and lettings brand, set new records for sales listings in June. Those considering a house move should considering using Ewemove.

CVS Group, one of the UK’s leading providers of veterinary services, provided a comprehensive assessment of business over the past few months. The soaring demand for pets over lockdown could offer a big post Covid-19 boost to CVS and the veterinary sector as a whole, and the difficulties experienced by small independent practices may also see an acceleration of the consolidation which could also benefit CVS. The market was clearly impressed, sending the shares up sharply.

Quartix, the supplier of vehicle tracking systems, announced impressive interim results highlighting the attraction of its long-term subscription-based model.

IG Design Group, one of the world’s leading designers and manufacturers of gift packaging, celebrations, stationery and Christmas crackers, reassured with its full year results. As a business serving over 210,000 stores for over 11,000 customers in over 80 countries, IG has a better picture than most of the market environment.

Commercial flooring manufacturer James Halstead’s primary concern was cash flow when the world went into lockdown. With trading conditions improving and the cash position robust they feel able to commit to a second interim dividend. All of us are likely to have walked on James Halstead’s Polyflor flooring at some time in our lives!

Smart Metering Systems, which installs and manages smart meters and carbon reduction assets, chose the perfect time to sell a portfolio of meter assets prior to the pandemic disrupting things. Its latest trading update confirmed that revenue and underlying profit would in line with expectations, reflecting the resilient nature of its business model and index linked recurring revenue.

Moving away from AIM, general portfolio holding Games Workshop, the fantasy games group which is also a constituent of the Ultimate Stocks portfolio, issued excellent results, despite the pandemic shutting down its business for 6 weeks. The extensive results statement is worth a read to gain a full understanding of this unusual high-performing business. The shares moved back to all-time highs and despite the valuation there could be plenty of growth potential in overseas markets.

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.

Fundamental portfolios hold shares in Alphabet, Apple and Microsoft. For a full assessment of results from all the big technology groups please visit or associated Investor’s Champion site. Fundamental clients get free subscriber access to all premium content.


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In case you ask..

Since the start of lockdown the unemployment rate in the UK remains relatively unchanged. So far so good. However, scratch the surface and a far more worrying picture begins to emerge. Figures from the Office for National Statistics showed that UK company payrolls fell by 649,000 between March and June, a 16.7% fall. The reason for this is obvious, people have remained employed through the furlough scheme but are not on their company’s payroll. Many experts believe we will not see the full effect this could have until the scheme ends in October.

However, The Office for Budget Responsibility has recently published a report warning that unemployment was likely to rise to a record 12% by the end of this year, falling back to 10% in 2021, and we have already seen several high-profile companies let staff go.

Oasis and Warehouse made 1,800 jobs redundant in April after being bought out of administration in April and later sold to Boohoo Group in May. Luxury fashion and accessories brand Mulberry cut 470 UK job cuts in June, a quarter of its global workforce.

So what has been the Government’s response to this looming crisis? Well they have committed to paying a job retention bonus of £1,000 for each furloughed member of staff brought back. This is courtesy of Rishi Sunak’s summer economic plan outlined last week. But will it be enough?

Two businesses who could be affected in very different ways are Dart Group a (Fundamental AIM portfolio holding) and Young & Co.

Dart Group, the owner of Jet2 airline, announced in April that it had placed 80% of its workforce on furlough and asked them to take a 30% pay cut during this time. However, reducing the cost associated with staff has done little to outweigh the impact of a mass cancellation of flights and travel restrictions and the firm has seen an 11 per cent decline in profits in the year to March 31. Virgin Atlantic, Easy Jet and British Airways have all confirmed they will be making significant redundancies and Jet2 is expected to follow suit. Considering the long term impact the pandemic will have on the travel industry it remains to be seen if the retention bonus will have much impact here.

Young & Co, which owns 220 pubs around the UK, announced in March that it would not be paying its final dividend and would furlough the majority of its staff. However, as pubs begin to reopen and early reports suggest patrons are all too willing to absorb any risks for a good pint, Sunak’s plan may be just enough to keep the bar staff pulling pints.

These measures will work for some businesses and not others and time will tell if they will be enough to keep Britain working.

Derek McLay
Fundamental Asset Management

 

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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Opportunities on AIM market after Covid-19?

There is no doubt that Covid-19 has changed the way we view our future. Investors and financial advisers alike are looking for the answers and the way to move forward. One thing we do know is that the show will go on regardless, Covid or non-Covid.

In the headlines this week, Boohoo Group reacted to criticism over work conditions at one of its suppliers and Rishi Sunak announced measures to kerb unemployment as business begin to reopen.

Join me and Fundamental co-founders Chris Boxall and Stephen Drabwell on the 28 July for our webinar: ‘Post-Covid opportunities in AIM you should be paying attention to.’ , where we will be discussing this and more. Find out why Boohoo group has never had a place in Fundamental portfolios and where we see the future for the UK economy and AIM. Click here or on the image below to register.

Last week, Chris and Stephen presented at Intelligent Partnership’s AIM Showcase webinar event where we discussed our response to Covid-19, our AIM portfolio for IHT solution and our views on why you should invest in AIM for growth and not just for potential tax savings. You can watch the videos from the link here.

Lastly, it is sunny around the UK today and due to be this weekend also. Enjoy the reopening of pubs and beer gardens, take care and be safe.

Derek Mclay

 

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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Value of AIM to the UK economy significantly outweighs cost of modest tax concession

An excellent report from specialist growth company research house, Equity Development, has highlighted the huge benefits AIM brings to the UK economy and how the mild encouragement provided by the Inheritance Tax concession to those considering an IPO onto AIM is a very large multiple of the cost in tax foregone by HMRC. We would urge you to read the report from the link here.

Equity Development considers AIM companies contribute over £33bn Gross Value Added (GVA) directly – over 40% more per employee than the national average – and just as much indirectly to the UK economy since their direct GVA has increased by 35% in the last five years, more than twice as fast as the average. Not only are AIM companies more productive than average, their productivity is growing – at 11% pa, significantly faster than average.

A report by Grant Thornton on AIM’s first 25 years shows that small companies listed on AIM perform ‘better’ – generating more added value, more employment and far greater tax receipts for HMRC – than comparable “private” companies. Grant Thornton found that:

• In their first year on AIM companies on average grew profits by 36%, and by 24% per annum for the next four years.

• Revenues grew 40% p.a. for three years, then 20% p.a. for the next two. Over the last five years AIM companies have outgrown, by a significant amount, the “private” companies in their sectors in nearly every case

AIM’s superior growth has, in just the last five years, added £4.7bn pa to UK economy and more than £1bn per annum to HMRC. But you may ask, at what cost?

The IHT concession is not a precise sum that can be easily calculated, but Equity Development reckons it ‘costs’ the Treasury c. £50m pa.

Like us, Equity Development questions why HMRC would abolish Business Relief (on which the IHT reliefs are based) to gain roughly £50m at a probable future cost to themselves exceeding £1bn per annum. They also suspect that much of the publicity given to suggestions that Business Relief should be abolished comes from promoters of more expensive, less useful IHT-avoidance schemes who are losing customers to simple AIM IHT ISAs. We have experienced on numerous occasions at first hand the added complexity and cost, including outrageous legal fees, imposed on relatively small estates with trust structures in place and would urge investors to think carefully before going down this route.

Not only is AIM of huge benefit to the UK economy but AIM listed companies represent the primary source of growth for UK small cap investors, reflected in the significant outperformance of AIM for IHT managers, including Fundamental, over the past decade or more.

You can find out more about Fundamental Asset Management’s high performing AIM portfolio service, which has been delivering exceptional investment returns for more than 16 years, from the link here.


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As AIM celebrates its 25th birthday, are the tax reliefs at risk?

A recent article in the popular press has alluded to the potential withdrawal of Inheritance Tax/Business Relief on AIM shares.

As a well-established investor in AIM for Inheritance Tax (‘IHT’) planning purposes, we have become used to regular press mutterings over the 16 years we have been managing our AIM for IHT portfolios. The introduction of an Autumn statement gave the press another opportunity to cover this topic, whether they had anything worthwhile to say or not.

It is also somewhat ironic that the latest press report comes at a time when AIM is probably enjoying the most positive period in its 25 year history, with numerous small AIM pharma and biotech groups at the forefront of developing tests and vaccines in the battle against Covid-19. This has not been possible without the support of their shareholders, many of whom have been encouraged to invest with the added attraction of IHT relief.

While there has always been the risk that tax relief might be removed or restricted in some form, if anything the tax reliefs for investing in AIM have been enhanced over the years. The availability of AIM shares in ISAs from 2013 resulted in a wave of new money finding its way to London’s growth market and the majority of new investment in our AIM for IHT portfolios (and no doubt those of other providers) is now via ISA transfers. The withdrawal of stamp duty on AIM shares in 2014 provided further encouragement.

Business Relief rules in brief
Investments that qualify for Business Relief (formerly Business Property Relief) can be passed on free from Inheritance Tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

The shares of qualifying AIM companies benefit from the Business Relief rules, which were introduced in the 1976 Finance Act by Labour Chancellor Denis Healey. The primary objective at that time was to ensure that, after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or split up to pay an IHT liability. For the purposes of the Business Relief rules, AIM does not meet the HMRC definition of ‘listed’, accordingly shares in qualifying companies on AIM carry the same Business Relief benefits as private trading companies.

Not all AIM companies qualify for Business Relief and, for a modest outlay, our associated Investor’s Champion’s AIMsearch tool can tell you which do, which don’t, and which are doubtful.

The evolution and maturity of AIM now means that many substantial companies and their shareholders benefit from Business Relief, causing some to question the appropriateness of this attractive tax incentive – AIM quoted boohoo Group, the UK’s fourth largest listed retailer with a market capitalisation of £5.3bn, which would gain it entry to the FTSE100 Index, qualifies for Business Relief purposes.

Intelligent Partnership, the UK’s leading provider of education and insights on alternative investments, has commented how, prior to the last Budget there was speculation that Chancellor Rishi Sunak might alter IHT – from something as radical as replacing it with a lifetime gifting allowance through to reducing or removing some of the Inheritance Tax reliefs, including Business Relief.

The removal of Business Relief would clearly have negative effect on the AIM market. According to Investor’s Champion’s AIMsearch, 65% of AIM companies qualify for the relief and a further 10% offer some qualification, subject to exclusion for excepted assets on their balance sheets. We consider that any impact from the withdrawals of relief may be less significant for larger more liquid AIM companies (Mkt cap £250m+), the share registers of which are now dominated by mainstream institutional investors, rather than AIM for IHT managers. For example, the share register of Fevertree Drinks, one of AIM’s largest and most successful companies with a market capitalisation of £2.4bn and a Fundamental AIM portfolio holding, is dominated by mainstream institutional funds, which hold 39% of the equity. The founders still retain a combined 11.76% but institutions have proved to be keen buyers of their shares in the past. The same applies to many other large, rapidly growing AIM companies, with institutions eager buyers of large parcels of shares if the opportunity arises. This has been notable over the pandemic where numerous AIM fund raisings have been supported by large mainstream institutional investors, as opposed to IHT money.

Furthermore, the premium rating of many AIM companies is less about IHT investor buying and more to do with the attractive growth prospects of many substantial AIM companies compared to the low-growth opportunities available on the main UK stock market.

Sunak ultimately left IHT and Business Relief alone with some speculating that planned tax rises and relief cuts have now been pushed back until after the coronavirus threat has subsided. However, the government re-iterated its support of mechanisms through which growth can be generated, stating: “The government places a high priority on expanding the supply of finance through the cycle to support long-term investment to increase the productive capacity of the economy, across all regions and nations of the UK. This includes, but is not limited to, areas such as infrastructure, SME finance, venture and growth capital”

The UK government will have a need for new sources of revenue in view of the huge cost of supporting the pandemic and, a so-called tax expert quoted in the recent article, commented how the removal of Business Relief could be much more attractive than raising VAT or income tax. However, this seems questionable if one considers the irrelevance of IHT relative to the total UK tax collection, the current corporate funding demands and need to stimulate growth.

The HMRC Annual and Report and Accounts 2018/19 (a must read!) reveals that IHT receipts, which are lumped together with Other taxes, were a meagre £5.3bn, or 0.854% of total tax revenues of £628bn in 2018/19. Wealthy individuals paid £54bn of tax, small businesses £115bn and large businesses £135bn. VAT, which is included in the business numbers, contributed £135.6bn to the overall tax. Inheritance Tax doesn’t even get a specific mention in the HMRC report.

HMRC Statistics indicate the value of Business Relief claimed on unquoted shares was £828m in 2016/17 across 1,480 estates, an average of £559k per estate. Other Business Reliefs were £417m on 848 estates. This implies total tax saved of £498m through the combined Business Reliefs (40% x £828m+£417m) or 0.08% of total tax receipts, if applied to the 2018/19 numbers.

These numbers highlight the irrelevance of IHT relative to the bigger tax take, suggesting the government will need to address the main sources of tax to boost its coffers, rather than tinker with IHT.

Furthermore, it would surely make better economic sense to enhance, rather than diminish, tax incentives for individuals in smaller companies. This would help stimulate growth and ultimately do more to boost overall tax collections by boosting the major tax collection points of PAYE, VAT and corporation taxes.

To avoid the potential pitfalls of a change in the Business Relief rules, the legal profession would like investors to embrace the apparent benefits of using a trust. When the two-year minimum holding period for AIM shares had been reached, solicitors suggest the shares could be put in trust to cement the tax exemption. This could conceivably protect investors from any retrospective change to the rules, although the estate will then be saddled with a costly and unwieldy trust structure which comes with its own set of tax rules and places the investor’s assets in the control of others.

We have experienced on numerous occasions at first hand the added complexity and cost, including outrageous legal fees, imposed on relatively small estates with trust structures in place and would urge investors to think carefully before going down this route.

Since launch on 19 June 1995, AIM has supported nearly four-thousand growth companies in raising over £117bn, 61% of which has been through follow-on fundraisings. The equity fund raisings over the pandemic have seen investors plough £billions into UK companies to help keep them going, removing a further burden from the government and 158 AIM companies have raised £1.9 billion of follow-on capital in the first five months of 2020. Research from Grant Thornton shows that AIM companies directly contributed £33.5bn to UK GDP and supported more than 430,000 jobs in 2019.

The London Stock Exchange’s collaboration with Primary Bid has also broadened retail investors’ access to follow-on equity raisings during this challenging period. Many of these same fund raises have also been supported by founders whose continuing equity interest in their companies is underpinned by Business Relief attractions.

It would be strange timing for the government to remove incentives for investment in companies, large and small, at the time they most need it. In a recessionary climate the greater focus surely needs to be on supporting growth, which will ultimately lead to enhancing the bigger tax collections.

For a limited period, we think the government should actually consider enhancing the tax incentives for investing in the newly issued shares of UK listed companies, whatever their size, whether on the main market or AIM. Now that’s a radical thought!

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

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.

 


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Health-care diagnostics are the pick of the week

Shares in high flying ITM Power (LON: ITM), the energy storage and clean fuel company, had an interesting week after announcing a distinctly underwhelming year end trading update.  It is quite staggering how a business with real annual sales revenue of only £3m can now be valued at over £1bn. There is clearly a huge opportunity ahead, but the valuation appears to be well ahead of itself and ITM is yet to demonstrate an ability to actually make any money from its technology. The market is  clearly unfazed by such trivial concerns.

Later in the week senior management of ITM exercised options over 3.9m shares, netting themselves over £13m. Shareholders probably won’t begrudge CEO Graham Cooley his seemingly outrageous £6m options bonus, with the shares up over 700% over the last 12 months. However, there does seem to be something inherently wrong with a system which richly rewards management based on a temporary share price growth, yet modest real commercial achievement.

RWS Holdings (LON:RWS), the world’s leading provider of intellectual property support services issued full year results which were broadly as anticipated and news of two acquisitions. Fundamental AIM portfolios hold shares in RWS, whose group businesses carry out patent translations, international patent filing and searches and life sciences translations. It is also a leading provider of localization services supporting blue-chip clients around the world. Overall, RWS is currently seeing limited impact on customer demand from Covid-19, with increased activity from large technology and life sciences clients who are working on vaccines and antibody testing. RWS also announced two fascinating acquisitions, one of them being a company developing best-in-class neural machine translation solutions.

Another Fundamental AIM portfolio company, Advanced Medical Solutions Group (LON: AMS), the surgical and advanced wound care specialist, issued a reassuring trading update. AMS has been experiencing a slowdown in demand for its products caused by the cancellation or postponement of elective surgeries, dental procedures and a reduction in the volume of accident & emergency treatments. However, with plenty of money in the bank and cash continuing to flow in, management reconfirmed its intention to recommend the payment of a final dividend for 2019.

There was a great story from Hornby (LON:HRN), the model railway group, which has been struggling over recent times. The fundraising efforts of Captain Tom Moore inspired Hornby to produce a model of the GB Railfreight Class 66 diesel locomotive which has been named after him, with the profits going straight to the NHS. The model sold out within hours of release, raising approximately £140,000 for NHS Charities Together, which will be donated on the launch of the model, later this year.

Portmeirion Group (LON:PMP), the designer and manufacturer of high quality homewares, raised £10m to fund its growth aspirations. The new money being raised will be used to accelerate its online efforts, extend its Wax Lyrical line and invest in its UK manufacturing operations. With more of us set to avoid restaurants, Portmeirion could do well as we refresh our cupboards, although perhaps they could do with some more youthful designs.

We struggle to understand the stock market suitability of OnTheMarket (AIM: OTMP), the majority agent-owned company which operates the OnTheMarket.com property portal. Its full year results were predictably terrible and another fund raise will surely be required to keep it afloat. The listed Group is 65% owned by over 3,000 agent shareholders which operate 6,000 branches which are offered preferential deals and shares in the listed group. The non-agent shareholders providing the real equity capital are therefore continuously being diluted through the issuance of incentive shares to agents.

Healthcare diagnostics has become a very hot area over the pandemic and Diaceutics (LON: DXRX), the diagnostic commercialisation company, raised £20.5m in the week to help support its ambitions.  Our associated research site Investor’s Champion recently published an in-depth commentary on Diaceutics.

Another diagnostic company, Immunodiagnostic Systems Holdings (LON:IDH), announced that its new automated Covid-19 IgG assay test had achieved CE marking and is expected to be available for sale by the end of this month. Shares in IDH soared more than 50% to levels not seen since 2017 in reaction to the news. The test is highly accurate, providing results in 25 minutes, and all the steps are automated with no manual reagent preparation required, ensuring minimal hands-on time for lab staff and therefore a high daily throughput.

Provider of essential infrastructure services, utilities connections and smart energy infrastructure, Nexus Infrastructure (LON:NEXS), announced decent results for the six months to 31 March 2020 and news of a £10m fund raise, with founders and Directors contributing £528,000. Fundamental AIM portfolios hold shares in Nexus.

Two of our general portfolio companies Games Workshop (LON:GAW) and Moneysupermarket (LON:MONY) issued updates, with the former the pick of the bunch.

Games Workshop confirmed that 306 of its 532 stores are now open in 20 countries, with the recovery in business since re-opening better than it had expected. For the year ending May 2020 they now anticipate sales of c£270m, which is ahead of consensus forecasts of £261m, and pre-tax profit no less than £85m which is marginally below. This includes royalties from licensing of £16m, up 40% on 2019 – the royalty opportunity for this business looks significant! With plenty of cash in the bank, management is already talking about repaying the government subsidies received to date.

While some of Moneysupermarket’s markets have been quieter, notably money and insurance, it has seen growth in energy switching searches and broadband. With cash continuing to flow into its coffers, net debt was a modest £0.8m, even after paying a final dividend of £46m, making MONY one of the few companies with the resources and cash flow to be able to commit to a final dividend.

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

Please visit our YouTube channel from the link here for a video covering news from the week.

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.


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Airlines stocks continue their recovery and quality continues to shine

Wizz Air Holdings (LON:WIZZ), the largest low-cost airline in Central and Eastern Europe, announced fantastic results for the year to 31 March 2020. Despite the challenging environment WIZZ is committing to the purchase of plenty of new aircraft over the next few years and has also announced its first ever flights from London Luton to Moscow and St. Petersburg. The shares of WIZZ and other airlines, including Fundamental AIM portfolio holding Dart Group (LON:DTG), operator of Jet2.com had another strong week, despite the UK government’s quarantine travel rules, which are coming into force on June 8. With the UK suffering the second-highest Covid-19 death rate after Spain, according to excess mortality figures, we find it somewhat ironic that the UK wants to restrict the movement of evidently more healthy visitors to these shores.

The latest AIM statistics from the London Stock Exchange highlight a strong bounce from London’s growth market which will celebrate its Silver Anniversary on 19 June.  At the end of May 2020 there were 832 companies on AIM, with the total market value £98.6bn compared with £88.5bn at the end of April. Our associates Investor’s Champion cover all the monthly updates from AIM.

AIM, which was originally called the Alternative Investment Market, was launched on 19 June 1995 as a replacement to the previous Unlisted Securities Market that had been in operation since 1980. At launch, AIM comprised only 10 companies valued collectively at £82.2m, with only one survivor, remaining from the original 10. May closed with 18 AIM companies valued at more than £1bn, several of which are Fundamental AIM portfolio constituents.

Fevertree Dinks (LON:FEVR), the world’s leading supplier of premium carbonated mixers, and another Fundamental AIM portfolio holding reassured with its AGM statement. While their On-Trade market remains fully or partially closed across many of their regions, Fevertree has been doing nicely from the increased consumption at home during lock-down. At home (Off-Trade) sales in the first full month of lockdown were up 24% year-on-year in the UK and they have seen continued positive momentum since, with its core tonic range performing particularly well. Off-Trade sales in the US nearly doubled in April and May.

XP Power (LON:XPP), one of the world’s leading developers and manufacturers of critical power control components to the electronics industry, and a long-term holding in Fundamental General Portfolios continues to impress. XP has been experiencing exceptional levels of demand from its Healthcare customers which includes critical applications used to treat Covid-19 patients (including ventilators). As usual this fabulous business looks in great shape.

IG Group (LON:IGG), the online trading platform and another Fundamental General Portfolio holding reported 119% growth in trading revenue in the fourth quarter of its financial year, with full year revenue 36% higher at £649m. The shares were flat on the news, implying that the good news was already priced into the current share price.

Gamma Communications (LON:GAMA), the provider of cloud communication services and one of AIM’s largest companies, continues to impress reporting strong growth and heightened demand for its Cloud based products. However, even Gamma’s robust business model has not fully escaped the impact of Covid-19 and some staff have taken temporary “leave of absence” while continuing to receive their full pay. Although the Group has met the criteria to make a claim under the UK Government’s Covid-19 Job Retention Scheme, management decided not to make such a claim on the grounds that that scheme was designed to protect jobs rather than to boost profits for companies who have been able to continue to trade.  With cash continuing to flow in and the balance sheet in great shape with plenty of cash, Gamma is one of the few companies confident enough to commit to the payment of a final dividend of 7.0 pence per share, up 13% on the prior year, which will cost £6.5m. Fundamental AIM portfolios hold shares in Gamma.

 

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

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.

 


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Markets need to pause

With many stocks bouncing strongly over the past few weeks, you could be forgiven for thinking that the world was back to normal, coronavirus a minor concern and a recession firmly off the cards….if only!

The FTSE100 index and its constituents of aged dinosaurs has risen 23% from the March lows, the S&P500 index has climbed 35% and the AIM index is up a staggering 48%, meaning it is now only 10% below the year highs.

While the initial sell-off was brutal for AIM, and in some cases fully justified given the questionable outlook for many companies whose businesses are faced with considerable challenges, the rebound from many stocks is all the more remarkable.

The week saw shares in boohoo Group (LON: BOO), the leading online fashion group and AIM’s largest company, rise to all-time highs as it acquired the remaining 34% of shares in prettylittlething.com Limited (‘PLT’) from its minority shareholders. BOO’s market capitalisation of £4.7bn makes it the UK’s fourth largest listed retailer by market capitalisation, ahead of Morrisons (£4.5bn) and Sainsbury’s (£4.3bn). At the current share price of 383p BOO shares trade at 60x revised forecast earnings for 2021 or 3.3x revenue and 42x earnings for 2022. There is no doubting the attractions of its online operating model and ability to acquire struggling brands on the cheap, but in a recessionary climate that is a mighty rating by any stretch. To put things into context, shares in Next (LON:NXT), another excellent retailer with a substantial online presence, trade at only 13.7x forecast earnings for 2022 or 1.7x sales. BOO has silenced the doubters before but it has a lot to live up to.

Video gaming companies on AIM have performed particularly strongly over the pandemic and in this interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of Fundamental Asset Management, discusses the recent performance of these and thoughts for the future.

Companies covered in the interview include:
Team17 (TM17), an existing Fundamental AIM portfolio holding.
Frontier Developments (FDEV)
Codemasters (CDM)
Keywords Studios (KWS)
Sumo (SUMO)

 

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

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for more than 16 years.