Derek Pain: AIM's not finished, but there's a long slog ahead

No Pain, No Gain
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The Independent Online

The no pain, no gain portfolio is looking a little more like its old self with the stock market regaining some of its former exuberance. But if, as many observers contend, small caps lead any revival then my little collection of shares has seriously underperformed.

A few have enjoyed the fun since equities nosedived earlier this year. AIM-traded Hargreaves Services, figures next month, and Clarity Commerce Solutions are showing commendable gains. But other small cap constituents, although perhaps narrowing their deficit, have failed to fully respond.

The FTSE AIM index at the time of writing is around 589 points. When shares in general were in the doldrums and the very future of AIM was being questioned, the index slumped below 400. The subsequent improvement is hardly the display expected of a pacemaker. Even so, I would have thought the portfolio, weighed heavily in favour of small caps, should have managed a more invigorating performance.

It is all a far cry from those distant days of 2006-07 when the index was riding comfortably above 1,200 and the portfolio was nearly £150,000 in profit. (At the last count, the gain was approaching £90,000. I am due to produce the regular quarterly valuation next month.)

AIM remains a deeply depressed area despite its rally. New issues and cash-raising exercises are subdued. And the level of daily trading is far from encouraging. It will be a long, hard slog before the junior market recaptures past glories. Indeed it is not difficult to find people who think AIM, as an investment force, is finished. I do not agree.

But I must concede that a quick fix is not possible. A first step could be to reduce the cost of an AIM presence, currently around £200,000 a year.

Investors, whose bank balances have suffered from the market's decline, will not be enamoured to read that the directors of AIM constituents enjoyed something of a basic pay bonanza last year with chief executives pocketing, on average, 10.8 per cent increases.

Although small caps may have let the side down, the portfolio's handful of fully listed shares has behaved much more promisingly. Booker, the cash and carry chain, has made progress; so has brewer Marston's. Mears, the social housing and home care group, has staged a revival, and leisure group Whitbread has narrowed – quite significantly – the once yawning gap from my buying price.

Booker shares have been helped by favourable comments from stockbroker Singer Capital Markets. It reckons that the shares are a buy, and says the group's programme of warehouse facelifts is increasing sales and margins. Plans to grow the delivery side are "compelling"and, assuming only "limited" acquisitions, debts could be wiped out in two years, adds the broker.

Interim figures last week appear to have strengthened the Mears rally. Revenue jumped from £203.3m to £232.7m and operating profit rose 18 per cent to £10.8m. With the dividend hoisted and chairman Bob Holt in bullish mode it is, perhaps, not surprising that the shares have climbed from nearly 220p last month to around 275p on the back of increased stock market confidence.

Yet Mears pre-tax profit – the figure I like to concentrate on – was, on a strict interpretation, lower, coming in at £7.3m against £7.7m. Still, there are extenuating circumstances. Allowing for amortisation and the impact of an acquisition, the figure was actually £8.4m compared with £7.7m.

As I keep complaining, results are getting more and more complicated with such an array of figures now being produced that shareholders are faced with a pick'n'mix assortment. In my younger days pre-tax and net profits were our staple diet.

The Mears acquisition was a loss-making company called 3C Asset Management, once part of Erinaceous, which went into administration last year. It is a £20m turnover social housing business with some rewarding contracts. Holt expects it to eventually make a significant contribution.

In the meantime, the group has a £1.8bn order book with more contracts in the pipeline. Already, almost all of this year's forecast revenue is in the bag and 70 per cent of next year's.

For 12 years Mears was traded on AIM but, last year, it "escaped" and joined the full market. The transition has yet to make much of an impact on the value of its shares.

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