AIM shows signs of strength

AIM saw a considerable upturn in the number of IPOs in the first half of the year.

AIM saw a considerable upturn in the number of IPOs in the first half of the year.

According to a research report by M&A’s sister publication, Growth Company Investor  – New Issues on AIM January-June 2010 –  AIM welcomed an encouraging 21 new entrants during the first half of the year.

Now, although this figure fell significantly short of the 109 and 46 arrivals from the comparative periods of 2007 and 2008 respectively, it still represents a considerable upturn, given that only three new issues made a foray onto AIM during the first six months of 2009.

Momentum gathers

Momentum is building sequentially, with six more companies having joined AIM in the first half of 2010 than in the previous six months, and appetite among institutional and other investors also appears to
be returning.

Total funds raised for the period amounted to £350.6 million, a 57.2 per cent increase over the £223 million raised for new issues during the H1 2009 nadir. Having said that, this sum is still barely a tenth of the money pulled in by IPOs during the bull market conditions of H1 2007 and is considerably down on the cash raised in the same period of 2008.

IPO activity in the first half was at its second-lowest for ten years, beaten to bottom place only by H1 2009. But by funds raised, there were three first-half periods that saw investors less willing to back new issues (in 2001, 2002 and 2009).

Not even AIM’s strongest adherents would call this a triumphant return to form, but it is definitive proof that activity is moving in the right direction, albeit with our research supporting the notion that the market remains cautious. Funds raised in IPOs may be up in total, but the average cash secured per new issue, at £16.7 million, is down on the £16.7 million for H1 2009.

Open for business

‘The new issues market is open, and companies with a good quality product will always find an audience,’ says Chris Bowman, a corporate financier at Liberum Capital, nominated adviser and joint broker to Africa focused coal explorer and developer Ncondezi Coal, which joined AIM in June with a £35.6 million fundraising. Liberum also acted as broker and adviser to Squarestone Brasil, the Anglo-Brazilian real estate developer that debuted in April with a £39.5 million initial market value following a placing at £1.

‘However, the bar has been raised in terms of quality,’ adds Bowman, noting that smaller fundraisings are ‘harder to get away’. He is working on two or three new issues scheduled for the fourth quarter of this year, but he doesn’t see a veritable flood of new arrivals on AIM, remarking that he just doesn’t think that there are enough good-quality companies around.

Nevertheless, with ten new issues coming to market in July and August this year, and a further five having announced their intention to float at the time of writing, there is every sign that AIM advisers will find themselves increasingly busy over the coming months.

But, like Brown, Sam Smith, CEO of small-cap-focused broker finnCap, doesn’t see a real surge in the number of companies joining the market until 2011. ‘We are saying Q1 or Q2 next year,’ she comments, referring to finnCap’s recent conversations with AIM hopefuls. She adds that the firm is working mainly on admissions that have come with their own cash, or reverse takeovers.

‘For those companies that want to come to market and raise significant amounts of cash, they have to be very aggressive on the price,’ Smith states. ‘The quality of the company and the pricing has to be right.’

Sectors – the shifting sands

Companies coming to market in the first half emanated from a broad spread of sectors, revealing how investors’ preferences have shifted over the past few years.

Significantly, the mining sector has made a comeback, with investors keen to tap into the recent commodity price boom.

Four of the 21 new AIM entrants of H1 2010 emanate from mining, for which £45.66 million was raised. Not far behind with three new issues is software & services, for which £78 million of fresh funding was raised, while two floats apiece swelled the AIM ranks in food producers, general retailers, support services and general financial, the leading sector with 11 new issues back in H1 2008. Significantly, one of early 2008’s leading sectors in terms of activity, oil & gas producers, attracted a solitary float this year against five new issues two years ago.

Although mining accounted for the most floats in the half, the largest single fundraising occurred within equity investment instruments in the form of the £105 million pulled in for Sherborne Investors. Next is the software & computer services sector, whose constituents are typically subject to the vagaries of the economic cycle and for which no funds were raised in a gloomy first half of 2008. However, some £78 million of fresh funding was raised for the sector this time around, which optimists might regard as a sign that investment in software and IT is beginning in earnest once again. Albeit raised for only two new issues, Malaysian data centre specialist CSF Group and EMIS Group, the strongly cash-generative supplier of software and services to GP practices, this sum was actually in line with the £79.3 million raised for the sector’s newcomers in the positively buoyant H1 2007.

Real estate and general financial, sectors that dominated the new issues fundraising landscape before the financial crisis, have fallen out of favour. General financial, which attracted more than £245 million of IPO financing in H1 2008, prised a meagre £6.3 million from investors this year, whereas real estate, which raised £1,065.4 million of financing for 16 companies, many of them overseas property funds, in H1 2007, secured just £28.26 million from a solitary flotation (Squarestone Brazil) in H1 2010.

New AIM leviathans

In the full report, a light is shone on the largest companies to have joined AIM, a list headed up by two resources firms, in a sign that investors are again showing an appetite for ‘blue sky’ opportunities and risk.

Bellzone Mining arrived on AIM with a £184.49 million market capitalisation after raising £33.6 million with the help of resources specialist Canaccord Genuity as broker and adviser and has seen its shares move 28.57 per cent higher since debut dealings.

Fellow Africa-focused resources stock Ncondezi arrived on AIM with a £146.6 million market capitalisation, after raising £35.6 million with Liberum Capital’s assistance, on hopes that it can make its fortune from prospecting and exploration licences in the Tete Province of Western Mozambique, one of the world’s last remaining undeveloped coking and thermal coal basins.

The largest IPOs by new cash raised are also explored. Sherborne Investors, the turnaround investment vehicle of activist Edward Bramson, for which £105 million was raised by RBS Hoare Govett, heads the pack by some distance in terms of fundraising size.

In its wake are EMIS, which boasts sticky clients and high recurring revenue, for which Evolution was able to comfortably raise £50 million, and also Ncondezi Coal.

After Bellzone Mining, Squarestone Brazil and CSF, it is worth highlighting the significant £20 million raised by Investec for Digital Barriers, brought to market as a cash shell by Tom Black, its executive chairman. Black built and then sold Detica, an IT minnow with a £20 million market value at float in 2002, to BAE Systems for £539 million in 2008, and former investors in Detica were quick to back his new venture in the hope that he can repeat the trick.

Price performers

The reception the 21 newcomers received from the market has been generally benign amid improving, albeit still volatile, stock market conditions. Share prices have posted a mean gain of 23.54 per cent, which contrasts with a barely-there 0.01 per cent improvement two years ago. Six stocks racked up share price gains of more than 20 per cent this year, while three were up more than 50 per cent.

Four of the best-performing stocks are resources-related plays, suggesting investor appetite has begun to return for the kind of risk this sector offers.

The list is led by cash shell Q Resources, brought to AIM by broker Fairfax I.S. by way of a £3.28 million funding. First dealings in the Jersey-incorporated investment company, led by members of the team that turned Cove Energy from cash shell into successful oil and gas venture, took place in April and the shares have notched up a 275 per cent share price gain since, most of it in the days following the float as two new investors took significant stakes in the company.

The second-best performer was Kea Petroleum, brought to market by way of a £6 million funding advised upon by RBC Capital Markets. Shares in the New Zealand-based oil and gas explorer, chaired by entrepreneur Ian Gowrie-Smith, the founding chairman of specialist drug delivery group SkyePharma, have achieved gains of almost 94 per cent since the company’s February IPO.

The worst-performing of the new issues – at least during the period under review – is Equatorial Palm Oil (EPO), whose shares have lost more than 35 per cent of their value since initial dealings in February.

EPO raised £6.5 million, through a placing at 17.5p, to develop sustainable palm oil plantations and a crude palm oil-processing operation in Liberia. Backed by Indian conglomerate The Siva Group, EPO recently reported significant, though reduced, 2009 losses of £943,000 (2008: £1.4 million).

A fellow poor performer is troubled yet recovering engineering and planning consultancy WYG, whose move from the Main Board to AIM by way of introduction in February marked the end of its recent restructuring. Shares in the refinanced WYG, at which debt levels mounted and recent trading has disappointed, surrendered the best part of 22 per cent of their value during the period under review.

For more information about the full report, New Issues on AIM January-June 2010, or to order a copy, contact Blanka Biernat on 0207 250 7056 or email

Nick Britton

Lexus Ernser

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...