Small Talk: Market minnows aiming to migrate to a bigger pond

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The Independent Online

Could the tide of companies moving from the main list of the London Stock Exchange down to AIM, the Alternative Investment Market, be about to turn? Catherine Stanley, manager of F&C Smaller Companies Fund, thinks there is a good chance it is.

Last week Connaught, which is focused on providing maintenance work to the social housing sector, became the second AIM company to move up to the main market this year. The F&C fund manager expects more to follow. Ms Stanley and her team are finding that more and more AIM companies are mulling a jump up to the big league in order to attract greater institutional interest.

She said: "We are starting to see increasing numbers of AIM companies with a market capitalisation of over £100m exploring the possibility of a full LSE listing. These are not companies at the speculative end of the scale, but established and profitable businesses."

AIM has been a great success story thanks to its flexible listing requirements and the favourable capital gains tax treatment of shares listed there. This has made it a particularly popular place for entrepreneurs seeking to raise capital. When the junior market was first set up, just over 10 years ago, it was envisaged as a stepping stone to the main list for small companies in their infancy - and yet 39 companies did the reverse and moved down to AIM last year. However, this trend seems to have peaked. So far this year only 14 firms have done so.

Meanwhile, Ms Stanley at F&C is also seeing a growing number of private companies which are looking to list on AIM for just a couple of years as a precursor to a full listing.

She said: "Many of these companies are realising that they can have better quality long-term support from institutional investors if they were fully listed. The fact that they are prepared to submit to tighter rules by gaining a full listing gives us more confidence in them and their management."

Many funds do not have AIM in their benchmarks, so this places a limit on the extent to which they can be exposed to stocks on the junior market.

By securing a main market listing, Ms Stanley points out, companies can tap into the broadest possible pool of investors. For example, any company valued at more than £120m is likely to be included straight into the FTSE Small Companies index, which means that tracker funds following the index are compelled to buy the stock.

PlusNet still adds up

Like all broadband providers, PlusNet has suffered from the intense competition which has gripped the sector. However, no player has seen its shares suffer quite so much as PlusNet. Since peaking at nearly 420p in April, they have collapsed and closed at 113.5p on Friday, valuing the group at just £31m.

However, maybe investors have become excessively bearish on the stock. In the six months to the end of June, its profits increased from £2.3m to £3m and the number of its subscribers from 176,000 to 198,000.

Given the competition, City brokers are assuming in their forecasts that PlusNet will not increase its subscribers by much over the next 18 months. However, that does not mean that profits at the group will stall. By the end of the current year, they should hit £6.6m and then rise to £7.3m in 2007.

How can this be achieved? PlusNet gets new business from referrals and does not have to spend vast amounts on advertising. This means the cost to the company of adding a new customer is very low, allowing it to make money even if it is experiencing tiny or non-existent growth.

In the long term, it seems inevitable that PlusNet will be taken over by a larger rival. Analysts have suggested that it would make a great acquisition for Pipex Communications. The stock is worth keeping an eye on.

Canada's Faces turns its gaze to UK

Faces Cosmetics, the Canadian branded cosmetics, skin care and anti-ageing products business, will today signal its intention to float on AIM. The group is not seeking any new money, having recently completed a £1.2m fund raising via a private placement.

The business was formed in 1974 and operates a franchise model in which third parties acquire the right to run Faces branded retail sites at locations such as shopping centres.

The group's product line, which consists of more than 1,000 individual items, is sold through 54 outlets in four countries: 35 in Canada, 16 in Mexico, 2 in the US and 1 in Ireland. It hopes in the years ahead to be able to expand in the US and progressively establish a presence in the UK and in continental Europe more generally.

Faces is certainly addressing a massive market. The North American cosmetics and skin care market is worth nearly £5bn per year while Europe is valued at £6.5bn annually, with the UK alone worth more than £1bn.

The recent fund raising Faces completed will be enough to fund its roll-out programme.

Brokers expect its shares to start trading on 7 September at 11.75p, valuing the company at £5.9m.

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