Small-cap success stories

AIM and PLUS may be flagging at the moment, but the markets are still turning out some outstanding success stories.

Organised by GrowthBusiness’ sister title Growth Company Investor and sponsored by financial and legal document specialist Millnet and others, the Growth Company Awards demonstrate that, even in a recession, companies which have gambled and positioned themselves in the forefront of a long-term change in business and consumer practices can achieve impressive results. That is what Nick Robertson, chief executive of online fashion retailer ASOS, named as AIM Company of the Year, has convincingly shown as he takes the north London-based company from strength to strength.

‘The internet continues to boom,’ declares Robertson. Only hours before accepting the award, he was able to announce that ASOS, which sells fashion items over the internet, had doubled annual sales to £165 million while increasing pre-tax profits ahead of market expectations to £13.8 million.

‘We show 23,000 products on our site and in nine weeks they will all have gone,’ explains Robertson, who sees ASOS as the ‘Amazon of the fashion business’. He claims the company, which is debt-free, is becoming a brand in its own right, with its own label adorning half of its products.

Floated at 20p on AIM in 2001, the shares hit 417p last year and now trade at 374p. ‘It has taken us nine years to get here with five to six million customers,’ reflects Robertson.

As more shops close on the high street and more people prefer to shop at home via the web, Robertson observes that the recent strength of the US dollar has helped international sales, which are growing at an impressive rate. Interestingly, the company is finding clothes aimed at the younger end of the market more resilient to the recession.

Model businesses

‘Global appeal’, ease of manufacture and an absence of competition with any major brand can also help in a recession. Graham Whitworth, chief executive of Sprue Aegis, winner of PLUS Company of the Year, recalls it was ‘the business model, not the product’, which gave birth to the Coventry-based fire detection and alarm business.

‘Usability is the key,’ insists Whitworth. Claiming half the UK retail market, Sprue Aegis, which manufactures in South East Asia and upped interim pre-tax profits 140 per cent to £685,000, is also sole supplier to Tesco. The company, which supplies 80 per cent of the UK’s fire brigades and recently clinched a marketing and distribution agreement with power supplier E.ON, sees scope for growth by increasing its share of the ‘replacement’ market.

Red tape could also work in Spruce’s favour. As yet, carbon monoxide detectors have a much lower penetration than fire alarms, but Whitworth suggests the UK market for these devices will grow if US-style regulations are introduced here. ‘It’s a big market opportunity,’ he proclaims.

A winning formula

Picking winning companies is no easier than picking winning products, but fund manager Harry Nimmo’s Standard Life Investment UK Smaller Companies Trust was named Small-Cap Fund of the Year for the second time in succession. He says the trust has achieved a formidable 11 per cent annual return since its launch in 1997 by ‘sticking rigidly’ to a defined selection process.

‘We are growth orientated,’ he explains. ‘We seek quality and momentum; the average holding stays in the fund for four years. The aim is to buy tomorrow’s large companies by picking businesses which know where they are going and have recurring revenues and predictability.’

With about 60 holdings, Nimmo and his team are not keen on ‘concepts or blue sky’ projects. Risk analysis plays a central role in the trust’s selections. Earnings and revenue are taken into consideration, along with factors such as directors’ dealings and prospective price/earnings ratios.

The trust looks at ‘Z scores’, based on balance sheets and cash flows. ‘We pick high scores and sell low ones,’ explains Nimmo, adding: ‘We like to see senior management and cross-check for rogue numbers and false steers.’

Nimmo accepts this process ‘does not work all the time. It works least well during recoveries, as in the past two months, when risk aversion turns to risk taking and bombed-out recovery stocks quadruple’.

But, ‘in the middle to late points in the cycle, when risk wanes, our process does very well. So we will under-perform in a five-month recovery phase, but do well in four out of five years’.

Appropriately enough, ASOS is the trust’s number one holding at present, followed by antibody manufacturer and online supplier Abcam. The trust also likes Telecom Plus, Podesa Solutions, Dominos Pizza, Craneware, Axis-Shield and Derwent Valley among others.

Another group with a winning investment formula is Elderstreet, which carried off the prize for VCT Fund Manager of the Year. Chairman and GrowthBusiness blogger Michael Jackson, who founded the venture capital trust in 1998, points out that since December 2005 its shareholders have benefited from a net asset value total return of 37.9 per cent, including dividends, and argues the recent ‘fall in investment entry pricing creates a great opportunity for experienced fund managers’.

Numis Securities, the institutionally-focused investment bank and broking group built up by entrepreneurial chief executive Oliver Hemsley, a one-time insurance underwriter, won two awards. The company won the accolade of AIM Broker of the Year, and James Hamilton, its prescient banking and financial wizard, was judged Analyst of the Year.

Twin win
Under Hemsley, Numis has established an enviable reputation in the small to mid-cap sector, having recently helped two fully-listed insurance groups, Beazley and Chaucer, raise funds in challenging markets. The company has also been winning new corporate clients, including online poker operator Party Gaming and financial services specialist IPF.

Hamilton, 39, who holds several other awards as well as his Growth Company accolade, suggests ‘there is now some reasonably good value out there, but anyone predicting an early recovery is being far too optimistic’. Having started in the City in 1991, when a previous bubble was starting to burst, he was able to recognise the signs of the latest market debacle in time and now recalls one key indicator, house prices, ‘did not bottom then until 1996’.

‘When people start thinking of new ways of setting value, you know things are going wrong,’ argues Hamilton. ‘If the old way of valuing says something is overvalued, it is overvalued.’ Of course, it takes strong nerves to act on this if you are alone and you have no defence if you make a mistake. ‘If you are wrong with the crowd, at least you have that protection.’

‘In every boom, people say this time it’s different and the bubble won’t burst,’ he reflects wryly. ‘When valuations start to breach fair value, old timers say “sell”, but bull markets always go on longer than people expect.’

Value in small caps

Hamilton now sees good value, but he fears current levels of indebtedness could hold things up as ‘you can’t borrow your way out of a recession, except by relaxing the savings ratio’. That said, the savings ratio, having fallen way below its trend level in the boom, is now shooting way above it, as people and companies grow cautious and scared.

Hamilton contends ‘small companies have the ability to dodge the worst, but market leaders find it hard to avoid what the overall market is doing’. Steering clear, therefore, of ‘economically sensitive’ companies, he sees value just now in financial adviser Tenon and broking group Hargreaves Lansdown.

London’s junior stock market looms large for Grant Thornton, voted AIM Accountant of the Year. Audit partner Charles Hutton-Potts points out that the firm, which is AIM market leader by the number of companies it represents, according to the Business XL AIM Adviser Index, ‘has always had entrepreneurial clients’ and ‘we know how to handle them in the right way to get the right results.’

Natural selection

Evolution Securities, headed by chief executive Andrew Umbers and winner of the AIM Adviser of the Year award, is another formidable player in this market. Formerly stockbroker Beeson Gregory and now part of investment concern Evolution Group, Evolution Securities advises 75 corporate clients, both on AIM and the Full List, and has raised more than £2 billion for them over the past three years.

Undaunted by what it sees as transient market setbacks, Evolution recently launched a strategic expansion, increasing its securities staff by almost a third to 190. Umbers says the intention is to ‘provide an innovative service, adapted to the needs of institutional and corporate clients’.

PLUS Adviser of the Year is Ruegg, a company which started out 17 years ago and later became heavily involved in the Ofex share market, which later became PLUS-quoted. Steered by chief executive officer Brett Miller and based off Knightsbridge, Ruegg has handled 50 floats so far and became an AIM nomad and broker within the last five years.

Senior Ruegg adviser Gavin Burnell says ‘not much is happening on AIM right now, but we are doing a lot on PLUS’. He cites raising £630,000 in the reverse takeover of PLUS shell ARH Leisure by Frontier IP, a company established to commercialise university-generated intellectual property, boasting some heavy-hitting City experience on its board.

Another winner who is optimistic about the challenging markets of today is Emma Kane, founder and chief executive of Redleaf Communications, a public relations company named Financial PR of the Year. ‘In times like this, PR can shine,’ she argues. ‘Clients seek personal relationships and value for money. You must be tailored to your clients and realise that a “one size fits all” approach will not work.’

Neil Matthews, equity markets partner at law firm Eversheds, crowned AIM Lawyer of the Year, says he regards the award as ‘recognition of our work since AIM began in the 1990s. I think AIM has been a fantastic success,’ he declares.

Matthews insists that AIM will recover from the current IPO drought, observing there is ‘a whole shoal’ of companies waiting to join the exchange when the conditions are right.

Keeping faith in AIM

He maintains ‘there is nothing better than taking a good young UK company to AIM, provided it is for the right reasons: to grow, do a deal or attract bright people.’ Eversheds has acted for construction services group May Gurney and others and helped take companies such as NCC and Spice from AIM to the Full List.

‘Every law firm has had a tough 12 months,’ comments Matthews. ‘But now we see a lot more confidence. There may be fewer flotations, but there are lots of merger and acquisition bargains around.’

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...