The hidden gems on Aim, London's junior market

Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.

London's Aim market had a grim end to the year.The FTSE Aim All-Share index peaked at just under 1,110 in the summer. Then, like most other global markets, itbegan a precipitous slide in early October, and closed2018 down 23%, at 850.Of course, the nature of Aim and its constituents (often young, high-growth, high-risk companies attracted by light-touch regulations) makes it prone to high-profile failures in risky sectors such as tech and resource exploration.

Yet the nastiest Aim surprises in 2018 did not come from these sectors. Bargain-booze retailer Conviviality went belly-up in spring last year after being hit with a "surprise" £30m tax bill.In October the Patisserie Valerie fraud began to come to light (see page 14). And near the end of the year, fashion group ASOS one of the UK's few genuine homegrown online leaders surprised the market with a profit warning.

Aim's IHT bubble

Yet while it's easy to blame the recent bout of queasiness on disaster stories, the reality, says Stephen English, head of Aim at Liverpool-based investment managers and stockbrokers Blankstone Sington, and manager of its Aim IHT portfolio, is that the retrenchment is simply due to the generally high valuations of many of the more attractive Aim stocks. Indeed, until October, it had been possible to talk about an Aim bubble of the kind witnessed at the turn of the millennium. On this occasion, rather than the mania for technology stocks, enthusiasm for Aim had been driven by one key thing: inheritance tax (IHT). About a third of all Aim-listed companies are thought to qualify for business property relief (BPR), which in turn means that investors in those companies can receive reliefon IHT.

Looking for hidden gems

English points out that certain companies flooring specialist James Halstead, wine retailer Majestic Wine and pub group Young & Co are three popular examples have what might be termed "exalted valuations" in part caused by the rise of Aim IHT portfolio services. As a result, the potential for the IHT rug to be pulled from certain stocks has already caused some instability in share prices. Fears that the chancellor would adjust the rules on BPR and Aim in the November Budget proved unfounded, but lingering fears remain that the Treasury might use the current tax simplification report which is due in the spring as an excuse to tinker. Gervais Williams, fund manager at Miton, notes such changes could hurt. "Longer term, the IHT market has been very helpful in keeping Aim viable."

Yet if investors are willing to seek opportunities away from the IHT spotlight then this effort will often be rewarded, says English. Analyst coverage of smaller companies is thin on the ground, partly due to the introduction of Mifid II regulations last year (which made the cost of research more transparent and thus harder to sell). Yet if fewer analysts are paying attention to a stock it should mean more opportunity to uncover hidden gems. Below are three stocks that English favours.

Three appealing Aim stocks

Driver Group (Aim: DRV)

Driver Group provides resolution services for handling disputes between clients and contractors on projects that have gone bad through cost overruns, delays or poor workmanship. Under previous management the company had struggled to get paid for work it had done. But a new team came in, raised money, and embarked on a turnaround. Pre-tax margins should rise closer to 10% from 6% last year, as it focuses on higher-margin work. The dividend has just been reinstated, and is covered seven times, giving plenty of room for growth.

For 2020, the shares trade on a single-digit price/earnings (p/e)ratio backed by £7m net cash on the balance sheet, and given the type of work it performs, the company should be resilient throughout the economic cycle.

Strix (Aim: KETL)

Pick up a kettle and look underneath chances are you'll see the word Strix. Strix is a global leader in the design, manufacture and supply of kettle safety controls, with a 38% market share. It has lots of scope for growth as more Americans take up the tea-drinking habit (market penetration of kettles in the US is just 15%, compared with 100% in the UK). Strix is automating more of its manufacturing to maintain its gross margins of 40%. It strenuously defends its patents and has even won cases in China, where it recently

forced an infringing manufacturer to cease using copycat controls and to fit Strix's own instead. On a p/e of below ten and a yield of more than 5%, the shares look good value.

Curtis Banks (Aim: CBP)

Curtis Banks provides pension administration services, mainly for self-invested personal pensions (Sipps) and small self-administered pension schemes (SSASs). Its business model is simple, scalable and sustainable. Rather than charge a percentage fee based on the value of a Sipp's assets (like most financial firms), it instead charges a fixed annual fee that rises with inflation. It can be viewed almost as an index-linked annuity

(as long as the assets remain under its administration, of course). With net cash on the balance sheet and operating margins that look set to rise towards 30%, we see long-term value in the shares, which trade

on 14 times forward earnings and yield 3%.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Get decades of growth at a discount with this healthcare investment trust
Investment trusts

Get decades of growth at a discount with this healthcare investment trust

Healthcare is set for strong long-term expansion but looks cheap. That makes this investment trust worth buying, says Max King.
19 Apr 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
16 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021