Derek Pain: AIM faces a hard slog to recapture past glories
No Pain, No Gain
Saturday 14 November 2009
The upper echelons of the London Stock Exchange may be enjoying a surprisingly rewarding time, but the junior end of the investment site continues to look rather desolate.
I have in the past commented on the dramatic decline suffered by the Alternative Investment Market, aka AIM. Now Deal Monitor, a researcher specialising in junior markets, has pointed out that AIM is destined to endure its worst year since it was created in the mid-1990s.
It seems that 24 constituents delisted last month, a 60 per cent increase on September. In the first 10 months of this year no fewer than 239 companies have, for a variety of reasons, decamped. Last year's corresponding figure is 196.
The credit crunch is a major influence in AIM's despair. In these rocky times, with cash hard to come by and trading exceedingly difficult, AIM companies, often young, aspiring groups with little ballast, are prone to come unstuck.
The high cost of an AIM presence, more than £200,000 a year, is another inhibiting factor. So is the increased regulation that companies now have to tolerate. With trading in the shares of many constituents down to little more than a trickle – in these more difficult times many investors have shunned small caps – there is little prospect of using shares for cash-raising or expansion. It is, therefore, perhaps not surprising that many boards opt to delist.
It might be advantageous for companies to disappear from the investment environment, but it is a savage blow to shareholders, who can find themselves confined to an investment wilderness after buying a tradable quoted share. True, some delisters provide a limited form of share market through the company secretary or the company stockbroker; a few depart to fringe markets, such as Plus. But, invariably, it is the shareholder that suffers.
The quoted side of the Plus market has also lost members, but it is a much smaller facility, and the impact of departures is much less pronounced. And it does offer some delisting safeguards. But there is little doubt that Plus is now making life more difficult for AIM.
In August it started making markets in all AIM shares. Since then its business has boomed. In September it handled trades in nearly 10 billion shares, more than double the figure in July.
I have experienced incidental evidence of this success. In the last two months I have dealt in three AIM shares through a leading execution-only stockbroker. On each occasion the trade was conducted on Plus.
Indeed, I gather that one of the deals was difficult to undertake. It seems the only way my modest order could be concluded was to tap Plus. The other two deals, it appears, went to Plus by choice.
At its peak AIM had nearly 1,700 constituents. It now has less than 1,100. I expect it to halt its membership decline and, perhaps, eventually recapture past glories. But it faces a long, hard slog.
Mears, a constituent of the no pain, no gain portfolio, is one deserter. It moved up market to full listing last year. The support services group has a strong record and should hit new profit highs this year. Chairman Bob Holt, in a trading update, said it had "experienced strong trading across all divisions". Around £450m of new contracts have been gained since March and the order book is £1.7bn.
With much of its income stemming from social housing and home care – two areas where significant spending cuts are unlikely – Mears should withstand the impact of the recession better than most.
Another constituent, AIM-traded Hargreaves Services Group, has also produced an encouraging trading statement, with chairman Tim Ross saying he was "happy with progress".
The portfolio's only exploration stock, Nighthawk Energy, has issued a bullish update on one of its US prospects, Xenia. Gas is flowing from eight wells, and five more are near to production. Just how much gas is on site has yet to be estimated, but there is a 50 per cent chance that more than 6.85 million barrels of oil lurk under Xenia's 3,700 acres.
I believe Nighthawk's shares are under priced. They are probably still suffering from a succession of placings. I note that Clarity Commerce Solutions, another constituent, has fallen since it indulged in a placing.
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